A method to evaluate credit risk for banks under PPP project finance

2019 ◽  
Vol 27 (2) ◽  
pp. 483-501 ◽  
Author(s):  
Xiuqin Wang ◽  
Lanmin Shi ◽  
Bing Wang ◽  
Mengying Kan
Keyword(s):  
Credit Risk ◽  
Cash Flow ◽  
Design Methodology ◽  
Interval Estimation ◽  
Risk Preference ◽  
Project Finance ◽  
Content Type ◽  
Potential Loss ◽  
Loss Range ◽  
Evaluating Method

Purpose The purpose of this paper is to provide a method that can better evaluate the credit risk (CR) under PPP project finance. Design/methodology/approach The principle to evaluate the CR of PPP projects is to calculate three critical indicators: the default probability (DP), the recovery rate (RR) and the exposure at default (EAD). The RR is determined by qualitative analysis according to Standard & Poor’s Recovery Scale, and the EAD is estimated by NPV analysis. The estimation of the DP is the focus of CR assessment because the future cash flow is not certain, and there are no trading records and market data that can be used to evaluate the credit condition of PPP projects before financial close. The modified CreditMetrics model and Monte Carlo simulation are applied to evaluate the DP, and the application is illustrated by a PPP project finance case. Findings First, the proposed method can evaluate the influence of the project’s cash flow uncertainty on the potential loss of the bank. Second, instead of outputting a certain default loss value, the method can derive an interval of the potential loss for the bank. Third, the method can effectively analyze how different repayment schedules and risk preference of banks influence the evaluating result. Originality/value The proposed method offers an approach for the bank to value the CR under PPP project finance. The method took into consideration of the uncertainty and other characteristics of PPP project finance, adopted and improved the CreditMetrics model, and provided a possible loss range under different project cash flow volatilities through interval estimation under certain confident level. In addition, the bank’s risk preference is considered in the CR evaluating method proposed in this study where the bank’s risk preference is first investigated in the CR evaluating process of PPP project finance.

Fair value, equity cash flow and project finance valuation: ambiguities and a solution

2017 ◽  
Vol 43 (8) ◽  
pp. 914-927 ◽  
Author(s):  
Krzysztof Jackowicz ◽  
Paweł Mielcarz ◽  
Paweł Wnuczak
Keyword(s):  
Cash Flow ◽  
Design Methodology ◽  
Fair Value ◽  
Project Finance ◽  
Content Type ◽  
Correct Method ◽  
Proposed Model ◽  
Debt Covenant ◽  
Increasing Function ◽  
Specific Timing

Purpose The literature on project finance appraisal contains several ambiguities mainly concerning the correct method of equity cash flow (ECF) determination. This vagueness can lead to serious misevaluation of these projects. The purpose of this paper is to present and justify a correct method of ECF determination for project finance evaluation. Design/methodology/approach Based on the analysis of the specificity of project finance ventures and the study of existing literature, the authors propose a coherent model of ECF estimation that avoids misevaluating project finance ventures. Findings This paper demonstrates that the potential dividends methodology of ECF estimation, used commonly in the corporate finance world, leads to the erroneous valuation of project finance investments. Moreover, simulations demonstrate that the scale of this misevaluation is an increasing function of the debt covenant duration, the required rate of return, and the investment outlay dispersion over time. The proposed model of proper project finance valuation, despite inconsistency with assumptions of the fair value concept, is best suited for project finance venture appraisal, taking into consideration the inherently specific timing of the ECF. Originality/value This paper rectifies, clarifies, and extends the range of existing solutions for the project finance valuation and the application of the concepts of actual dividends and potential dividends in different valuation contexts. Furthermore, it proposes a simple and coherent method to value project finance ventures. Additionally, it offers evidence of the scale of NPV misevaluation in project finance, which occurs when the potential dividends approach is utilized.

Modeling heterogeneous risk preferences

2017 ◽  
Vol 77 (2) ◽  
pp. 324-336 ◽  
Author(s):  
Zhengfei Guan ◽  
Feng Wu
Keyword(s):  
Design Methodology ◽  
Absolute Risk ◽  
Risk Preferences ◽  
Risk Preference ◽  
Economic Behavior ◽  
Empirical Estimation ◽  
Agricultural Producers ◽  
Content Type ◽  
General Production ◽  
Production Decision

Purpose The purpose of this paper is to propose a general framework for modeling heterogeneous risk preferences of agricultural producers and identifying the underlying factors that affect risk preferences. Design/methodology/approach This paper nests the risk preference function in a general production decision framework to test and model producers’ risk preferences. The framework allows for both production and price risk, and accommodates potential inefficient behavior. Panel data and the GMM method are used in the empirical estimation. Findings The results in this study confirmed the hypothesis of heterogeneous risk preferences. Farmers are found to have decreasing absolute risk aversion. Both farmer characteristics and socioeconomic factors have significant impact on producers’ risk preferences. The results suggest that ignoring heterogeneity in risk preferences across individuals and how non-wealth variables could affect farmers’ risk preferences could result in biased economic behavior analysis. Originality/value It is generally assumed in the literature that risk preferences are homogeneous among farmers at given wealth. This is a strong assumption and there are abundant evidences that suggest otherwise. This paper makes contributions to the literature by proposing an approach to modeling heterogeneous risk preferences and identifying the factors that affect preferences.

Measuring Shariah non-compliance risk (SNCR): claw-out effect of al-bai-bithaman ajil in default

2017 ◽  
Vol 8 (3) ◽  
pp. 272-283
Author(s):  
Saiful Azhar Rosly ◽  
Muhammad Arzim Naim ◽  
Ahcene Lahsasna
Keyword(s):  
Content Analysis ◽  
Design Methodology ◽  
Islamic Banking ◽  
Legal Environment ◽  
Islamic Banks ◽  
Legal Cases ◽  
Content Type ◽  
Potential Loss ◽  
Critical Requirement ◽  
Practical Implications

Purpose The purpose of this paper is to examine the meaning, nature and measurement of Shariah non-compliant risk faced by Islamic banks. Design/methodology/approach Al-bai-bithaman ajil (BBA) contract documentation is analyzed in the light of the legal environment in Malaysia and measurement of Shariah non-compliant risk based on constructed or hypothetical cases. Findings Shariah non-compliant risk will adversely affect bank’s earnings when BBA contracts are deemed invalid in the court of law, either in a foreclosure or ruling via court declaration. Research limitations/implications The paper is written based on content analysis, Malaysian legal cases with hypothetical examples for better understanding. Practical implications Islamic banking should be able to use the findings to estimate potential loss from Shariah non-compliant risk and make the necessary provisions. Originality/value This paper provides new insights of risks faced by credit-intensive Islamic banks, that when relinquishing critical requirement of Islamic contract such as ownership risk will suffer loss.

Protecting cash flows during a major crisis

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Keyword(s):  
Crisis Management ◽  
Cash Flow ◽  
Design Methodology ◽  
Reading Time ◽  
Business Processes ◽  
Cash Flows ◽  
Marketing Strategies ◽  
Content Type ◽  
Pertinent Information ◽  
Practical Implications

Purpose This paper aims to review the latest management developments across the globe and pinpoint practical implications from cutting-edge research and case studies. Design/methodology/approach This briefing is prepared by an independent writer who adds their own impartial comments and places the articles in context. Findings Major crises like the Covid-19 pandemic can negatively impact on cash flow of small B2B firms. But SMEs affected can address the issue by implementing relevant marketing strategies associated with three key business processes to enhance their crisis management. Originality/value The briefing saves busy executives and researchers hours of reading time by selecting only the very best, most pertinent information and presenting it in a condensed and easy-to-digest format.

The effects of equity financing and debt financing on technological innovation

2019 ◽  
Vol 14 (4) ◽  
pp. 698-715 ◽  
Author(s):  
Ling Zhang ◽  
Sheng Zhang ◽  
Yingyuan Guo
Keyword(s):  
Technological Innovation ◽  
Design Methodology ◽  
Econometric Model ◽  
Positive Impact ◽  
Risk Preference ◽  
Developed Countries ◽  
Risk Tolerance ◽  
Debt Financing ◽  
Equity Financing ◽  
Content Type

Purpose The purpose of this paper is to compare the effects of equity financing and debt financing on technological innovation, and prove that the enhancement of a financing system’s risk tolerance for technological innovation can enhance the innovation risk preference of enterprises and thus promote innovation. Design/methodology/approach This study is based on a transnational sample of 35 developed countries from 1996 to 2015, by using the panel econometric model to empirically examine the effects of two financing modes on innovation. Findings The findings showed that equity financing, which has higher risk tolerance, has a more positive impact on innovation than debt financing in terms of both economic uptrend and economic downtrend, and that government efficiency plays a significant role in supporting the performance of technological innovation. Originality/value The paper provides a research framework for examining how a financing system’s risk tolerance capacity affects the development of technological innovation through promoting risk preference among enterprises. This paper provides transnational and cross-cycle comparative evidence that equity financing with a strong risk tolerance capacity can better support technological innovation, even in periods of economic downtrend. Moreover, the importance of financing system’s risk tolerance capacity for innovation during economic crises is discussed.

A comprehensive decision support approach for credit scoring

2019 ◽  
Vol 120 (2) ◽  
pp. 280-290 ◽  
Author(s):  
Cuicui Luo
Keyword(s):  
Decision Support ◽  
Credit Risk ◽  
Design Methodology ◽  
Credit Scoring ◽  
Predictive Performance ◽  
New Approach ◽  
Content Type ◽  
Risk Scoring ◽  
Using Data ◽  
Stable Classification

Purpose The purpose of this paper is to provide a comprehensive decision support approach in credit risk assessment. Design/methodology/approach A comprehensive decision support approach is proposed for credit scoring and prediction. The predictive performance of the new approach has been investigated by using data including number and text. Findings The results demonstrate that the proposed approach achieves better and more stable classification accuracy than the single classifiers in most cases. Meanwhile, the prediction accuracy of individual classifiers is also improved by the proposed approach. Originality/value This study provides a comprehensive model for credit risk scoring and provides valuable information to the existing literature on credit scoring by using artificial intelligence.

Investment risk preference among Greek SME proprietors: a pilot study

2014 ◽  
Vol 21 (1) ◽  
pp. 177-193 ◽  
Author(s):  
Margarita Georgousopoulou ◽  
Max Chipulu ◽  
Udechukwu Ojiako ◽  
Johnnie Johnson
Keyword(s):  
Risk Management ◽  
Pilot Study ◽  
Regression Models ◽  
Design Methodology ◽  
Risk Preferences ◽  
Critical Role ◽  
Risk Preference ◽  
Investment Risk ◽  
Content Type ◽  
Greek Economy

Purpose – Current research in the area of risk management within small and medium-sized enterprises (SMEs) appears predisposed towards risk, predominantly dealing with the willingness of SMEs to take on losses. However, in this pilot study, the authors aim to focus on a different aspect of risk management in SMEs, namely the risk preferences. Risk preferences in this case are regarded as the willingness of SME proprietors to take on risks that are likely to lead to investment gains. Design/methodology/approach – Data is gathered via a combination of a survey questionnaire and a probability scenario toolset. The authors sampled a total of 150 SME proprietors operating in Greece. The data was analysed using a combination of regression models and binomial tests. Findings – The results suggest that we cannot, as previous literature suggests, conclude that SME proprietors generally exhibit a negative risk preference. Originality/value – In light of Greece's recent economic difficulty, and in acknowledgement of the critical role played by SMEs in the Greek economy, this study addresses a topical subject in entrepreneurship research: what are the factors determining investment risk preferences?

Downtime analysis of drilling machines and suggestions for improvements

2014 ◽  
Vol 20 (4) ◽  
pp. 306-332 ◽  
Author(s):  
Hussan S. Al-Chalabi ◽  
Jan Lundberg ◽  
Andi Wijaya ◽  
Behzad Ghodrati
Keyword(s):  
Design Methodology ◽  
Interval Estimation ◽  
Working Environment ◽  
Underground Mines ◽  
Statistical Accuracy ◽  
Content Type ◽  
Failure Data ◽  
Potential Component ◽  
Critical Components ◽  
General Method

Purpose – The purpose of this paper is to analyse and compare the downtime of four drilling machines used in two underground mines in Sweden. The downtime of these machines was compared to show what problems affect downtime and which strategies should be applied to reduce it. Design/methodology/approach – The study collects failure data from a two-year period for four drilling machines and performs reliability analysis. It also performs downtime analysis utilising a log-log diagram with a confidence interval. Findings – There are notable differences in the downtime of most of the studied components for all machines. The hoses and feeder have relatively high downtime. Depending on their downtime, the significant components can be ranked in three groups. The downtime of the studied components is due to reliability problems. The study suggests the need to improve the reliability of critical components to reduce the downtime of drilling machines. Originality/value – The method of analysing the downtime, identifying dominant factors and the interval estimation for the downtime, has never been studied on drilling machines. The research proposed in this paper provides a general method to link downtime analysis with potential component improvement. To increase the statistical accuracy; four case studies was performed in two different mines with completely different working environment and ore properties. Using the above method showed which components need to be improved and suggestions for improvement was proposed and will be implemented accordingly.

Real earnings management and financial statement fraud: evidence from Malaysia

2018 ◽  
Vol 26 (4) ◽  
pp. 508-526 ◽  
Author(s):  
Noorul Azwin binti Md Nasir ◽  
Muhammad Jahangir Ali ◽  
Rushdi M.R. Razzaque ◽  
Kamran Ahmed
Keyword(s):  
Earnings Management ◽  
Cash Flow ◽  
Design Methodology ◽  
Production Costs ◽  
Real Earnings Management ◽  
Financial Statement ◽  
Financial Fraud ◽  
Financial Statement Fraud ◽  
Content Type

Purpose We examine whether the fraud firms are engaged in real earnings management and accrual earnings management prior to the fraud year in the Malaysian context. Design/methodology/approach Our sample comprises of 65 financial statement fraud and 65 non-fraud firms over a period of eight years from 2001 to 2008. Findings Using the abnormal cash flow from operations (CFO) and abnormal production costs as the proxies for real earnings management, we find that financial statement fraud firms engage in manipulating production costs during preceding two years of the fraud event. However, our results show that financial fraud firms engage in manipulating CFO prior to the fraud event. Additionally, we find that financial statement fraud firms prefer to manipulate earnings using accruals relative to real earnings prior to the fraud year. Originality/value Our results demonstrate that real earnings management is more aggressive in financial statement fraud firms compared to the non-fraud firms in the four years prior to fraud.

The Imagination Premium: An anticipative performance metric

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Rita Gunther McGrath ◽  
Alex van Putten ◽  
Ron Pierantozzi
Keyword(s):  
Cash Flow ◽  
Design Methodology ◽  
Leadership Teams ◽  
Portfolio Analysis ◽  
Content Type ◽  
Performance Metric ◽  
Corporate Growth ◽  
Practical Implications ◽  
Future Growth

Purpose The authors offer a new metric for assessing a company's potential for growth that CEO's and leadership teams can actively manage. Design/methodology/approach The Imagination Premium metric reflects the value of a company's equity, beyond what can be readily explained by its ability to throw off cash. Findings For a CEO, TIP provides support for an argument that investments in future growth are well warranted. Practical/implications A negative TIP signals that investors will not even pay for the capitalized value of current cash flow and this usually leads to activist investors, hostile acquisition threats and C-suite turnover. Originality/value The article shows executives how to drive the premium investors will pay for corporate growth initiatives. One of the first things strategists can do to manage their company's TIP is a portfolio analysis that looks at how uncertain each current investment is, and whether the whole portfolio is one growth investors will reward with an increased TIP.

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