Title: Investments as key entrepreneurial action: the case of financially distressed target companies

Authors: David J. Rapp; Marius Haßlinger; Michael Olbrich

Addresses: IWP Institut für Wirtschaftsprüfung, Saarland University, Campus, B 4.1, D-66123 Saarbrücken, Germany ' IWP Institut für Wirtschaftsprüfung, Saarland University, Campus, B 4.1, D-66123 Saarbrücken, Germany ' IWP Institut für Wirtschaftsprüfung, Saarland University, Campus, B 4.1, D-66123 Saarbrücken, Germany

Abstract: Recent entrepreneurship research characterises investments as the very essence of entrepreneurship, supplanting the discovery or creation of opportunities. M&A activity must, therefore, be understood as a key entrepreneurial action. Corresponding M&A decisions require a reliable appraisal beforehand. This is particularly true in case of financially distressed target companies, since such transactions include a high level of uncertainty. The recent financial crisis can be characterised as a cause of companies' financial distress. For the appraisal of such financially distressed companies, literature recommends the same methods used for the appraisal of healthy companies. As will be shown, prevalent appraisal methods cause a profound dilemma when applied for the appraisal of financially distressed companies. Consequently, they need to be substituted by a consistent alternative. The aim of this paper, therefore, is to discuss such an alternative method, which can be consistently applied for the entrepreneurial appraisal of financially distressed - or even bankrupt - companies.

Keywords: entrepreneurship; investments; financial distress; appraisal; discounted cash flow; DCF; future earnings method; FEM; subjectivism; judgemental decision-making.

DOI: 10.1504/IJEV.2018.094627

International Journal of Entrepreneurial Venturing, 2018 Vol.10 No.5, pp.558 - 580

Accepted: 02 Oct 2016
Published online: 05 Sep 2018 *

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