Normative Research On Valuation Adjustment Mechanism Of China Corporations

It is well known that financial derivatives have an effect of positiveand negative sides. The advantage is to finance, avoid risk, and to getprofit. The disadvantage is that enterprises will undertake high risk fromits high-level feature and uncertainty. Therefore it is a “double-edgedsword”. But high risk from financial derivatives, especially from OTCderivatives should deserve attention. Since the1990’s, high risk fromfinancial derivatives begins to emerge. For instance, subprime crisisfrom America cause to financial crisis since2007.from this financialcrisis we can see its high risk. Another instance, Morgan Stanley has aserious loss from OTC derivatives. These cases above express that theproblem of Normative Research on financial derivatives become moreand more outstanding. Therefore it is very important to use OTCderivatives normatively.It is well known that financial derivative is a “double-edgedsword”.The advantage is to finance, avoid risk, and to get profit. Thedisadvantage is that enterprises will undertake high risk from itshigh-level feature and uncertainty. But high risk from financialderivatives, especially from OTC derivatives should deserve attention.Since the1990’s, high risk from financial derivatives begins to emerge.For instance, subprime crisis from America cause to financialcrisis,from this financial crisis we can see its high risk. Another instance, Morgan Stanley has a serious loss from OTC derivatives. These casesabove express that the problem of Normative Research on OTCderivatives become more and more outstanding. Therefore it is veryimportant to use OTC derivatives normatively.In recent years, domestic enterprises frequently use a kind offinancial derivatives called Valuation Adjustment Mechanism tofinance.It is a key part of Venture Capital or Private Equity, usedfrequently in the capital market of the western countries,and called beton agreement. As a kind of non-standard financial derivatives, it has aneffect of positive and negative sides. On the one hand,it can providefinancing channel for enterprises in China,and can promote profitabilityincrease greatly. On the other hand,it also has a higher risk. There is nodenying that it can provide good financing platform for domestic smalland medium-sized enterprises, and compared to the red tape of bankcredit, harsh conditions and high cost, it can provide a lot of, thedevelopment of low cost capital. Through the successful use of it,domestic small and medium-sized enterprises will realize own scalerapid expansion, its performance will increase rapidly, which can lay agood foundation to the future development of domestic small andmedium-sized enterprises. At the same time, when the domestic smalland medium-sized enterprises developed, it can promote employmentand has an important role in promoting economic prosperity in the further. Thus, it is a kind of important investment and financing systemarrangement. However, valuation adjustment agreement, after all, is akind of financial derivatives, moreover, the domestic financial market isundeveloped, Entrepreneurs’ cognitive degree and risk degree is notenough on it. As a result, investment and financing both sides inevitablyface a variety of risk when they using it. In the financial markets, if thedomestic small and medium-sized enterprises failed to use it, then therewill be huge claims from investors, domestic small and medium-sizedentrepreneurs may even lose control of this enterprise, become nothingat all. Therefore, it has a very high risk.Review of the domestic financial market, the use of valuationadjustment agreement often occurs between small and medium-sizedenterprises with overseas investment institutions. Companies involvingrelated cases such as, Mengniu dairy, Yongle electrical appliances,Taizinai group, Chinahr, etc. During the "bet" with overseas investmentinstitutions, winning enterprise is relatively smal. Successful typicalcases such as Mengniu dairy’s valuation adjustment agreement signedwith overseas investment institutions, investors take two injections tomengniu dairy. They signed two times respectively, the end result is thatmengniu milk is successful, at the same time, the investor has a highreturn. Most of the domestic small and medium-sized enterprise endedin failure, the author refers to the related literature, combining the various views concluded that the main cause of failure is not the use ofthe specification. Failure of representative cases such as yongleelectrical appliances, it is also signed agreements with overseasinvestors. But without careful consideration, to the enterprise itselfexpectations too high, too optimistic to expect cost-benefit with reality,so it can not complete agreement index, makes it losses and eventuallybe acquired.To sum up, normative using valuation adjustment agreement is notonly its own need, also is the need of the reality in financial markets.Domestic scholar’s research and the actual situation of financial marketssuggests that Valuation Adjustment Mechanism between tend to occur inthe domestic small and medium-sized enterprises and foreign investors,and the investor’s purpose is to obtain high returns, investors in order toachieve rapid expansion development. Therefore, this article studiesfocus on positioning from the perspective of economics and finance, onthe domestic small and medium-sized enterprises (to achieve rapidexpansion development) and overseas investors (secure high returns) onthe problem of normative using of it. In this paper, we study six parts, inthe first part discusses the research background and significance; Thesecond part introduces the relevant theory and literature on it. The thirdpart from the positive and negative effect to introduce the specificationof the reality; The fourth part analyzes its application situation and typical cases; The fifth part from the angle of economics and finance,combination of cost-benefit, phased investment and financing,probability theory, real option and the principle of bayesian statistics,put forward relevant solution of normative using on ValuationAdjustment Mechanism; Finally,The article summarizes researchconclusion, and puts forward further research problems.