scholarly journals Group Affiliation and Default Prediction

2019 ◽  
Vol 65 (8) ◽  
pp. 3559-3584 ◽  
Author(s):  
William H. Beaver ◽  
Stefano Cascino ◽  
Maria Correia ◽  
Maureen F. McNichols
Keyword(s):  
Financial Reporting ◽  
Financial Distress ◽  
Default Risk ◽  
Credit Rating ◽  
Balance Sheet ◽  
Group Affiliation ◽  
Consolidated Financial Statements ◽  
Cross Sectional ◽  
Default Prediction ◽  
Group Information

Using a large sample of business groups from more than 100 countries around the world, we show that group information matters for parent and subsidiary default prediction. Group firms may support each other when in financial distress. Potential group support represents an off-balance sheet asset for the receiving firm and an off-balance sheet liability for the firm offering support. We find that subsidiary information improves parent default prediction over and above group-level consolidated information possibly because intragroup exposures are netted out upon consolidation. Moreover, we document that improvements in parent default prediction decrease in the extent of parent-country financial reporting transparency, a finding that suggests that within-group information matters most when consolidated financial statements are expected to be of lower quality. We also show that parent and other group-firms’ default risk exhibits predictive power for subsidiary default. Lastly, we find that within-group information explains cross-sectional variation in CDS spreads. Taken together, our findings contribute to the prior literature on default prediction and have direct relevance to investors, credit-rating agencies, and accounting regulators. This paper was accepted by Suraj Srinivasan, accounting.

Rating Agency Adjustments to GAAP Financial Statements and Their Effect on Ratings and Credit Spreads

2014 ◽  
Vol 90 (2) ◽  
pp. 641-674 ◽  
Author(s):  
Pepa Kraft
Keyword(s):  
Default Risk ◽  
Credit Rating ◽  
Credit Ratings ◽  
Balance Sheet ◽  
Financial Statements ◽  
Financial Statement ◽  
Credit Spread ◽  
Credit Spreads ◽  
Term Structures ◽  
Interest Expense

ABSTRACT I examine a dataset of both quantitative (hard) adjustments to firms' reported U.S. GAAP financial statement numbers and qualitative (soft) adjustments to firms' credit ratings that Moody's develops and uses in its credit rating process. I first document differences between firms' reported and Moody's adjusted numbers that are both large and frequent across firms. For example, primarily because of upward adjustments to interest expense and debt attributable to firms' off-balance sheet debt, on average, adjusted coverage (cash flow-to-debt) ratios are 27 percent (8 percent) lower and adjusted leverage ratios are 70 percent higher than the corresponding U.S. GAAP ratios. I then find that Moody's hard and soft rating adjustments are associated with significantly higher credit spreads and flatter credit spread term structures. Overall, the results indicate that Moody's quantitative adjustments to financial statement numbers and qualitative adjustments to credit ratings enable it to better capture default risk, consistent with it effectively processing both hard and soft information.

GASB No. 34's Governmental Financial Reporting Model: Evidence on Its Information Relevance

2007 ◽  
Vol 82 (1) ◽  
pp. 205-240 ◽  
Author(s):  
Elizabeth Plummer ◽  
Paul D. Hutchison ◽  
Terry K. Patton
Keyword(s):  
School Districts ◽  
Financial Reporting ◽  
Default Risk ◽  
Balance Sheet ◽  
Cash Flows ◽  
Working Capital ◽  
Information Relevance ◽  
Net Assets ◽  
Accrual Basis ◽  
The Government

This study uses a sample of 530 Texas school districts to investigate the information relevance of governmental financial statements published under Governmental Accounting Standards Board Statement No. 34 (GASB No. 34). Specifically, we examine whether the new government-wide statements provide information relevant for assessing a government's default risk, and if this information is incremental to that provided by the governmental funds statements. GASB No. 34 requires governments to publish governmental funds statements prepared on a modified accrual basis, and government-wide statements prepared on an accrual basis. We find that GASB No. 34's Statement of Net Assets (similar to a corporation's balance sheet) provides information relevant for assessing default risk, and this information is incremental to that provided by the governmental funds statements. However, GASB No. 34's Statement of Activities (similar to a corporation's income statement) does not provide information relevant for assessing default risk. The accrual “earnings” measure is not more informative than the modified-accrual “earnings” measure. A government's modified accrual earnings measure can be thought of as a type of measure of changes in working capital. Therefore, our results are consistent with research on corporate entities that attributes the superiority of earnings over cash flows primarily to working capital accruals and not long-term accruals. For our sample of school districts, evidence suggests that total net assets from the government-wide Statement of Net Assets, along with a measure of modified-accrual “earnings” from the governmental funds statement, provide the best information for explaining default risk.

The Effectiveness of Credit Rating Agency Monitoring: Evidence from Asset Securitizations

2015 ◽  
Vol 90 (5) ◽  
pp. 1779-1810 ◽  
Author(s):  
Samuel Bonsall ◽  
Kevin Koharki ◽  
Monica Neamtiu
Keyword(s):  
Default Risk ◽  
Credit Rating ◽  
Balance Sheet ◽  
Rating Agencies ◽  
Credit Rating Agency ◽  
Rating Accuracy ◽  
Rating Agency ◽  
Debt Issuance ◽  
Current Exposure

ABSTRACT This study investigates how differences between the rating agencies' initial (at the date of debt issuance) and subsequent (post-issuance) monitoring incentives affect securitizing banks' rating accuracy. We hypothesize that the agencies have stronger incentives to monitor issuers when providing initial versus post-issuance ratings. We document that initial ratings are positively associated with off-balance sheet securitized assets and incrementally associated with on-balance sheet retained securities. However, subsequent ratings fail to capture current exposure to off-balance sheet securitizations. We also find that subsequent ratings reflect default risk less accurately than initial ratings. The subsequent ratings' responsiveness to default risk is worse when a bank has more off-balance sheet securitized assets. Collectively, our findings are consistent with lax post-issuance monitoring. They raise questions about the effectiveness of using ratings as an ongoing contracting mechanism and suggest that conclusions about rating accuracy could differ depending on whether researchers focus on initial versus post-issuance ratings.

IFRS Adoption in the EU and the Challenge of Nomenclature Evidence from the UK, France, and Germany

2016 ◽  
pp. 134-143
Author(s):  
Matthias Nnadi ◽  
Sailesh Tanna
Keyword(s):  
Financial Reporting ◽  
Balance Sheet ◽  
Financial Statements ◽  
Stock Exchanges ◽  
The European Union ◽  
Consolidated Financial Statements ◽  
Financial Reporting Standards ◽  
Ifrs Adoption ◽  
The Uk ◽  
The Eu

Since the adoption of International Financial Reporting Standards (IFRS) and the subsequent directive by the European Union (EU), all companies operating in the EU are required to report their consolidated financial statements in line with the IFRS. This study examines the consolidated financial statements of the top 170 listed companies in three major EU stock exchanges (UK, France and Germany) and uncovered a disparity in the use of common nomenclatures. The findings reveal that the inconsistencies in the application of terminologies such as statement of financial position instead of balance sheet and sequence of arrangement of assets in order of liquidity constitute the main differences for entities operating in the three countries. Such differences pose an imminent challenge in the comparability and interpretation of financial results.

scholarly journals An Empirical Analysis of Financially Distressed Italian Companies

2016 ◽  
Vol 9 (10) ◽  
pp. 75
Author(s):  
Luca Sensini
Keyword(s):  
Financial Distress ◽  
Default Risk ◽  
Research Question ◽  
Balance Sheet ◽  
Annual Reports ◽  
Data Set ◽  
Industrial Firms ◽  
Main Research ◽  
Financial Indices ◽  
Selection Of

<p>This paper investigates the performance of forecasting models for default risk referring to the annual balance sheet information of Italian firms. One of the main issues in bankruptcy predictions is related to the selection of the best set of indicators. Therefore, our main research question concerns the identification of the determinants of corporate financial distress, comparing the performance of innovative selection techniques. Furthermore, several aspects related to the default risk analysis have been considered, namely the nature of the numerical information and the sample design. The proposed models take in consideration the above-mentioned issues and the empirical results, elaborated on a data set of financial indices expressly derived from annual reports of the industrial firms. These reports provide evidence in favor of our proposal over the traditional ones.</p>

scholarly journals An evaluation of the usefulness of cash flow ratios to predict financial distress

2007 ◽  
Vol 7 (1) ◽  
Author(s):  
L. Jooste
Keyword(s):  
Cash Flow ◽  
Financial Reporting ◽  
Financial Distress ◽  
Balance Sheet ◽  
Cash Flows ◽  
Mean Values ◽  
Additional Information ◽  
Financial Failure ◽  
Flow Information ◽  
Cash Flow Statement

Purpose: With the introduction of the cash flow statement it became an integral part of financial reporting. A need arose to develop ratios for the effective evaluation of cash flow information. This article investigates cash flow ratios suggested by various researchers and suggests a list of ratios with the potential to predict financial failure. Design: The cash flow ratios suggested by researchers, from as early as 1966, are investigated and eight cash flow ratios selected for inclusion in an analysis to predict financial failure. Ten failed entities are selected for a cash flow evaluation by means of the selected ratios for five years prior to failure. For a comparison, non-failed entities in similar sectors are selected and also evaluated by means of the cash flow ratios. The mean values of each ratio, for each year prior to failure, were then calculated and the means of the failed entities were compared to the non-failed entities. Findings: The comparison revealed that cash flow ratios have predictive value with the cash flow to total debt identified as the best indicator of failure. It was also determined that, although failed entities have lower cash flows than non-failed entities, they also had smaller reserves of liquid assets. Furthermore, they have less capacity to meet debt obligations and they tend to incur more debt. The ratios of the failed entities were unstable and fluctuated from one year to the next. Finally, bankruptcy could be predicted three years prior to financial failure. Implications: Income statement and balance sheet ratios are not enough to measure liquidity. An entity can have positive liquidity ratios and increasing profits, yet have serious cash flow problems. Ratios developed from the cash flow statement should supplement traditional accrual-based ratios to provide additional information on the financial strengths and weaknesses of an entity .

scholarly journals THE ADAPTATION OF PROFIT AND LOSS ACCOUNT TO THE CURRENT REQUIREMENTS REPORTING OF THE PERFORMANCES

10.26458/1637 ◽  
2016 ◽  
Vol 16 (3) ◽  
pp. 93
Author(s):  
Liana GADAU
Keyword(s):  
Financial Performance ◽  
Financial Reporting ◽  
Balance Sheet ◽  
Accounting Information ◽  
Financial Statements ◽  
Enterprise Performance ◽  
Consolidated Financial Statements ◽  
Dynamic Information ◽  
National Regulation ◽  
Complex Activities

The financial performance - a very complex notion and high informational load forusers of accounting information is reflected best by the financial statements, the profit andloss account and the situation of equity variations. The last situation can be presented as astatement of comprehensive income, including beside the result of profit and loss account, thegains and losses directly recognized in equities without passing through the profit and lossaccount.The development of increasingly complex activities emphasizes the utility, thenecessity of the profit and loss account in the financial reporting by increasing the interest inthe enterprise performance, especially for the dynamic information that this situation canprovide.Meanwhile, there is a declining interest in the historical costs and static information.Although the balance sheet contains information on performance, it does not prevent theachievement of its forecasts.In this paper we propose to approach the profit and loss account in view of tworepresentative referential, namely in terms of IAS 1 standard “The preparation andpresentation of the financial statements” and the national regulation, the Finance Order no.1802/2014 regarding the Approval of the Accounting Regulations on the annual individualand consolidated financial statements, aiming to emphasize the advantages, but also thelimits provided by this models. This way, will see which of these models of profit and lossaccount respond best to users’ needs.

An Empirical Analysis of Default Prediction Models: Evidence from lndian Listed Companies

2015 ◽  
Vol 8 (3) ◽  
pp. 1-23
Author(s):  
Vandana Gupta
Keyword(s):  
Financial Distress ◽  
Default Risk ◽  
Prediction Models ◽  
Empirical Work ◽  
Predictive Ability ◽  
Financial Statements ◽  
Distress Risk ◽  
Kmv Model ◽  
Default Prediction ◽  
The Impact

This paper attempts to evaluate the predictive ability of three default prediction models: the market-based KMV model, the Z-score model using discriminant analysis (DA), and the logit model; and identifies the key default drivers. The research extends prior empirical work by modeling and testing the impact of financial ratios, macro-economic factors, corporate governance and firm-specific variables in predicting default. For the market-based model, the author has extended the works of KMV in developing a suitable algorithm for determining probability of default (PD). While for the KMV model, the continuous observations of PD are used as the dependent variable, for the accounting-based models, ratings assigned are the proxy for default (those rated ’D’ are defaulted and rated ‘AAA’ and ‘A’ are solvent). The research findings largely support the hypothesis that solvency, profitability and liquidity ratios do impact the default risk, but adding other covariates improves the predictive ability of the models. Through this study, the author recommends that accounting –based models and market based models are conceptually different. While market-based models are forward looking and inclusion of market data makes the default risk quantifiable; to make the PD more exhaustive, it is important to factor in the information provided in the financial statements. The conclusions drawn are that the disclosures in financial statements can help predict default risk as financial distress risk is likely to evolve over time and will be reflected in financial statements beyond accounting ratios. Moreover this will also help divulge “creative accounting” practices by corporates.

scholarly journals Is Bankruptcy Risk a Systematic Risk? Evidence from Pakistan Stock Exchange

ETIKONOMI ◽  
2020 ◽  
Vol 19 (1) ◽  
pp. 51-62
Author(s):  
Imran Umer Chhapra ◽  
Iffat Zehra ◽  
Muhammmad Kashif ◽  
Raja Rehan
Keyword(s):  
Asset Pricing ◽  
Stock Returns ◽  
Financial Distress ◽  
Default Risk ◽  
Stock Price ◽  
Stock Exchange ◽  
Systematic Risk ◽  
Cross Sectional ◽  
Bankruptcy Risk ◽  
Distressed Firms

This study empirically investigates the relationship between default risk and cross-section of stock returns in the Pakistan Stock Exchange (PSX). Stock price data from all listed and delisted companies use to calculate monthly returns from 2001-2016. Ohlson's O-score is employed to measure exposure of firm to systematic deviation within bankruptcy risk. Besides, asset-pricing models like the Capital Asset Pricing Model (CAPM) and Fama French (FF) models are employed. Portfolios are sorted in deciles by default probability. This result finds that stocks of firms significantly exposed to not diversified Default Risk yield higher returns. Besides that, the FF models explain cross-sectional stock returns since factors incorporate information on financial distress and default. After that, the book-to-market equity factor is not significant in elucidating returns of distressed firms because of market inefficiency. Results have practical implications for portfolio managers and investors of an emerging economy in developing diversified portfolios during periods of uncertainty and market volatility.JEL Classifications: G12, G15, G33How to Cite:Chhapra, I. U., Zehra, I., Kashif, M., & Rehan, R. (2020). Is Bankruptcy Risk a Systematic Risk? Evidence from Pakistan Stock Exchange. Etikonomi: Jurnal Ekonomi, 19(1), 51 – 62. https://doi.org/10.15408/etk.v19i1.11248.

scholarly journals Municipal bonds as a tool for financing capital investment in local government units in Palestine

2020 ◽  
Vol 17 (1) ◽  
pp. 213-226
Author(s):  
Khaled Zedan ◽  
Ghassan Daas ◽  
Yaqin Awwad
Keyword(s):  
Local Government ◽  
Financial Reporting ◽  
Financial Distress ◽  
Capital Investment ◽  
Reporting Quality ◽  
Municipal Bonds ◽  
Cross Sectional ◽  
Study Results ◽  
Outstanding Debt ◽  
Sectional Analysis

Municipal bonds are an option available to many cities to raise long-term financing to finance the infrastructure projects. This study aims to develop and find local measures of creditworthiness that are suitable and applicable for local government units in Palestine. Different variables are recognized to see the effect on the issuance of municipal bonds, macroeconomic variables measured by revenues and expenditures per capita, cost of capital, and unemployment rate. Municipal status variables have subgroup variables of municipality size, financial reporting quality, outstanding debt, and financial distress. Various financial ratios, comparative and cross-sectional analysis, horizontal and vertical analysis were used. These ratios and analysis have been used to determine the municipal status variable. The results of the study were limited to the largest 11 sample municipalities; each is the central local government unit at the governorates and was not generalized for all municipalities in Palestine. The study found that macroeconomic and municipality status affects the issuance of municipal revenue bonds. Based on the study results, municipal bonds are highly recommended. Also, instructions from the Ministry of Local Government need to be established and to enforce municipalities about the declaration date of publishing audited financial statements.

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