Does A Positive Perpetual Growth Rate Exist?—A Fundamental Rethinking Of Finance
Valuation is the core function of finance, which is often based on a positive perpetual growth rate of some return or cash flows. Considering the bankruptcy or finite life expectancy of a firm, the growth rate must be negative rather than positive. On the other hand, people cannot accept the negative long-term or perpetual growth rate for a currently healthy firm. We refer to this contradiction as the ZZ growth paradox. Enlightening by the paradox, based on Moodys data of default rates, we reexamine the important valuation issues when the finite life of a firm is incorporated, such as the bankruptcy probability and the life expectancy of various rated firms, the effects of the negative growth rate on the valuation and the discount rate. While the negative growth rate cannot be refuted eventually, some insights are revealed, such as deeper reason of the financial crises.
perpetual growth rate Gordon growth model bankruptcy probability ZZ growth paradox
ZHANG Zhiqiang
School of Business, Renmin University of China, Beijing, P. R. China, 100872
国际会议
2010 International Conference on Management(2010管理国际大会)
上海
英文
221-227
2010-07-24（万方平台首次上网日期，不代表论文的发表时间）