The Effectiveness Of Valuation Adjustment Mechanism--the Motivation System In Corporate Governance

Private Equity is undergoing quick development in the past10yearsadopted by strategic investor s as a general financing policy or in pre-IPOprocess of a company. Valuation adjustment mechanism is widely used toremove the uncertainty on domestic valuation market. It even becomes anindispensible part of a deal.The nature of the valuation adjustment mechanism is established onfreedom of civil conduct, presents exchange agreement on future uncertainincome. Such nature discloses the self-adjustment ability of market economyand the match between risk and premium. The relative fair price included inaleatory contract perfectly adapts to information asymmetry originated fromthe financial market.From the economic view, valuation adjustment mechanism is thefeedback on adverse selection and moral hazard in the informationasymmetry environment. It best motivates the management, is best for theinvestors to control risk, and is also Pareto Optimality in economy.The value of the VC contract with VAM integrated corresponds to thelinear combination of two option payoffs, a bond and a call but differs.We compare the result from real option model and net cash flow byquantitative method using several cases. We find the some nature ofvaluation adjustment mechanism is providing an arrangement and realizingvalue discovery as a financial tool liking option.We further confirm the nature from setting up premium formula ofvaluation adjustment mechanism.