Does A Positive Perpetual Growth Rate Exist?—A Fundamental Rethinking Of Finance

摘要

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 Moody's 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.