Research On The Application Of Valuation Adjustment Mechanism In Private Equity Financing

With the development of our country’s economy, Enterprise’s financing channels become diversified. More and more enterprises choose the way of private equity financing. With the booming private equity industry, it has become an important part in financial market of our country.By using private equity financing, enterprises can introduce the advanced management mode and the financial system, which lays a solid foundation for Enterprises’entering the capital market to finance and develop in the future.Enterprises’private equity financing is often associated with the signment of VAM-Mainly because it is difficult for the two sides to make a correct judgement of100%for the future development of enterprises.In order to redraw the profit boundary,they need to adjust the original investment conditions according to the actual operation performance. Today, it has been more common for Chinese enterprises to introduce private equity financing and sign VAM to broaden the financing channels. There’re not only enterprises like Mengniu and Sina, who gambled successfully, but also enterprises which bankrupt or been bought by rivals, such as Nanfu and Yongle etc. Enterprises’risk of private equity financing depends largely on the implementation of VAM. VAM is a double-edged sword, and investors and financing enterprises can achieve a win-win situation by the well use of it. So research on what are the main risks by using the gambling agreement in private equity financing and how to prevent and control the possible risk of using VAM is significant.This article is divided into six chapters.The first chapter:Introduction. First of all, Chinese Enterprises’ current situation of application of VAM in private equity financing are summarized. Under the background of the study, the focus of this paper, risk of using VAM in private equity financing is drawn out. Then it explains the research significance of this paper, the identification and control of risk of using VAM in private equity financing from the angle of investors and financing companies, providing countermeasures and suggestions to prevent and control the possible risk of VAM and to realize win-win. Then this article research ideas and research methods. main contributions and shortcomings are elaborated.The second chapter:Literature review. This part mainly reviews the domestic and foreign correlational research about private equity financing and VAM. And a brief comment is given. According to the domestic existing VAM relevant research, it can be divided into four categories:The first category simply Introduces the concept of VAM and its history. The second category is related to VAM with the case introduction and analysis. The third category is based on economics or finance perspective, discussed at the micro level. In addition, there is a part of the research is to focus on the areas of law concerns.The third chapter:the theoretical analysis and the status quo. First, This part defines the concept of private equity financing and VAM, then analysis necessity of the signment of VAM. After that, it elaborates risk of using VAM in private equity financing from the angle of investors and financing companies. Finally, the status quo of using VAM in private equity financing is described.The fourth chapter:mainly introduces the background under which VAM between Biguiyuan and Merrill Lynch is signed and introduce applicability of VAM in this case. First, this chapter Analysis the financing party, finding Private equity financing can solve the financing needs of enterprises to a certain extent and is the rapid development strategy of the enterprise. And for the investor, signment of VAM. is an important means of reducing investment risk. Further analysising of VAM, it is the means of solving the information asymmetry between investors and financing companies. VAM can be incentive and restraint of the management and reduce the agent cost and supervision cost to a certain extent.The fifth chapter:this part takes Biguiyuan-Merrill Lynch VAM as an example. By theoretical analysis and case study, this article summarizes that investors may face risks such as irresponsible preliminary investigation, short-term behavior and little incentive effect. The financing party may face risks such as blindly signed the agreement on gambling, the high standard set of gambling, not being able to achieve the gambling standard, enterprise’non-rational expansion and the short-term behavior of investors. Then the summary analysis of Biguiyuan-Merrill Lynch gambling case, evaluation of the two sides in the betting in risk to get the experience and lessons. Furthermore, it provides some countermeasures and suggestions to prevent and control the possible risk of application of VAM in order to help the actual work.The sixth chapter:policy suggestions, study limitations and future research prospects. It summarizes the points worthy of attention in private equity financing when using VAM and reveals the core design of VAM is to make specific design of core risk factors in view of the current market situations, such as the stock price of Biguiyuan in this case. Finally, this paper provides some countermeasures and suggestions for controlling risks of using VAM and puts forward the deficiencies and possible future research directions.The main contribution of this paper:Firstly, this paper has a deep and specific case study about risks and avoidance of it about VAM. While previous studies only focused on the theory research.Secondly, the research is solid. As the case between Biguiyuan-Merrill Lynch is more complex than the previous cases, it needs more patience to read many formal and informal documents. The analysis of this case is more detailed and thorough since it is based on a large number of data collection and analysis. Besides, this paper try to analysis the path on which agreement on gambling based to achieve financial performance and that it is not always useful to rely thehigh-speed growth financial path to achieve gambling standard.Thirdly, through the research on avoiding and controlling the risks of VAM, this paper can enrich the method system of private equity financing risk management.The defect of this paper is that it just has a case study about VAM between Biguiyuan and Merrill Lynch, which has limitations. The VAM they signed can only reflect some special risks in private equity financing and can’t cover all aspects of risk. Looking into the future, efforts should be strengthened to enrich the sampling and to have comparative case studies, widen the investigation and develop study in depth, in a bid to make the research in risks of applying VAM in private equity financing on a more solid footing.