The Effect of Default Risk in the Industry on the Relationship between Corporate Default Risk and Stock Returns

2021 ◽  
Vol 10 (6) ◽  
pp. 277-290
Author(s):  
Bum-Soo Park ◽  
Jung-Min Kim
Keyword(s):  
Stock Returns ◽  
Default Risk ◽  
Corporate Default ◽  
The Relationship

scholarly journals DOES DEFAULT RISK MATTER FOR INVESTORS IN REITS

2020 ◽  
Vol 24 (5) ◽  
pp. 1-14
Author(s):  
Yezhou Sha ◽  
Zilong Wang ◽  
Ziwen Bu ◽  
Nick Mansley
Keyword(s):  
Stock Returns ◽  
Risk Premium ◽  
Default Risk ◽  
Negative Relationship ◽  
Investment Strategy ◽  
Idiosyncratic Volatility ◽  
Asset Growth ◽  
Capm Beta ◽  
The Relationship

We investigate the relationship between default risk and REIT stock returns. A default risk long-short investment strategy generates a return of 15% per annum. We also evaluate a large number of potential explanations for the negative relationship between default risk and subsequent stock returns. We do not find robust evidence that the default risk premium can be explained by firm size, book-to-market equity, asset growth and idiosyncratic volatility. However, CAPM beta shows some promise in explaining the default risk premium. Our results shed further light on the role of default risk in investment in REITs.

Default Risk and Stock Returns: Evidence from Indian Corporate Sector

2021 ◽  
pp. 097226292110033
Author(s):  
Gurmeet Singh ◽  
Ravi Singla
Keyword(s):  
Stock Returns ◽  
Default Risk ◽  
Stock Return ◽  
Linear Regression Analysis ◽  
Negative Relationship ◽  
Point Of View ◽  
Z Score ◽  
Score Model ◽  
Financial Obligation ◽  
The Relationship

Default risk is associated with the probability that a leveraged firm is not able to pay its financial obligation on time. Relationship between default risk and stock returns is very important from investor’s point of view because it has important implication for risk and return trade off. Relationship between default risk and returns is debatable issue and contradictory results are found in the literature regarding the relationship between default risk and stock returns. Default risk assessment helps the investors and lenders to accurately assess the risks to which investors or lenders are exposed. There are several models which can be used to assess the probability of default. In the present study, the widely used Altman’s Z-score model is used as a measure of default risk to find out the relationship between default risk and stock returns using simple linear regression analysis. It is found that Altman’s Z-score can be used as a measure of default risk and results indicate the existence of positive relationship between Z-score and stock return and hence a negative relationship between default risk and stock return.

Governance, risk-taking and default risk during the financial crisis: the evidence of Japanese regional banks

2017 ◽  
Vol 17 (2) ◽  
pp. 212-229 ◽  
Author(s):  
Tsung-Ming Yeh
Keyword(s):  
Stock Returns ◽  
Risk Taking ◽  
Default Risk ◽  
Content Type ◽  
Risk Monitoring ◽  
Governance Practices ◽  
Regional Banks ◽  
Governance Risk ◽  
The Relationship ◽  
Risk Taking Behaviors

Purpose This study aims to provide additional insights by further investigating the governance aspects including board composition, risk monitoring and management by the board, ownership structures as well as the incentive compensation. Design/methodology/approach This study investigates the relationships between corporate governance, risk-taking behaviors and default risk by analyzing 78 publicly listed Japanese regional banks during the 2007-2008 crisis period. Findings Banks that were more diversified in the run-up to the crisis were associated with higher default risk during the crisis. Foreign shareholders may have prompted banks to engage in higher risk-taking activities in pursuit of higher returns, putting banks at a higher risk of default. On the other hand, board-level risk management committees may have mitigated the risks to protect firms from rising default. Finally, banks perceived to have better quality accounting information, by being audited by one of the Big 4 auditors, benefitted by mitigating price misevaluation and thus reducing default risk during the crisis. Originality/value Different from the majority of previous related studies on the relationship between governance and performance of stock returns, the current study focuses on the relationship between governance and default risk during the crisis which has a more direct link through which governance practices can affect risk-taking behaviors and thus the default risk during the crisis. In addition to examining conventional governance aspects, this study also focuses on the more relevant aspects of banks’ risk monitoring functions.

Corporate default risk modeling under distressed economic and financial conditions in a developing economy

2020 ◽  
Author(s):  
Frank Ranganai Matenda ◽  
Mabutho Sibanda ◽  
Eriyoti Chikodza ◽  
Victor Gumbo
Keyword(s):  
Default Risk ◽  
Developing Economy ◽  
Risk Modeling ◽  
Corporate Default ◽  
Financial Conditions

Corporate Default Risk and Loan Pricing Behaviour in China

2017 ◽  
Author(s):  
Hongyi Chen ◽  
Jianghui Chen ◽  
Gaofeng Han
Keyword(s):  
Default Risk ◽  
Loan Pricing ◽  
Corporate Default

Merton-type default risk and financial performance: the dynamic panel moderation of firm size

2022 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Muhammad Mushafiq ◽  
Syed Ahmad Sami ◽  
Muhammad Khalid Sohail ◽  
Muzammal Ilyas Sindhu
Keyword(s):  
Financial Performance ◽  
Firm Size ◽  
Default Risk ◽  
Banking Sector ◽  
Generalized Method Of Moments ◽  
Dynamic Panel Data ◽  
Dynamic Panel ◽  
Content Type ◽  
Nonfinancial Firms ◽  
The Relationship

PurposeThe main purpose of this study is to evaluate the probability of default and examine the relationship between default risk and financial performance, with dynamic panel moderation of firm size.Design/methodology/approachThis study utilizes a total of 1,500 firm-year observations from 2013 to 2018 using dynamic panel data approach of generalized method of moments to test the relationship between default risk and financial performance with the moderation effect of the firm size.FindingsThis study establishes the findings that default risk significantly impacts the financial performance. The relationship between distance-to-default (DD) and financial performance is positive, which means the relationship of the independent and dependent variable is inverse. Moreover, this study finds that the firm size is a significant positive moderator between DD and financial performance.Practical implicationsThis study provides new and useful insight into the literature on the relationship between default risk and financial performance. The results of this study provide investors and businesses related to nonfinancial firms in the Pakistan Stock Exchange (PSX) with significant default risk's impact on performance. This study finds, on average, the default probability in KSE ALL indexed companies is 6.12%.Originality/valueThe evidence of the default risk and financial performance on samples of nonfinancial firms has been minimal; mainly, it has been limited to the banking sector. Moreover, the existing studies have only catered the direct effect of only. This study fills that gap and evaluates this relationship in nonfinancial firms. This study also helps in the evaluation of Merton model's performance in the nonfinancial firms.

Do Financially Constrained Firms Earn Higher Returns than the Unconstrained Firms? A Comprehensive Evidence from Pakistan Stock Exchange

2020 ◽  
Keyword(s):  
Time Series ◽  
Asset Pricing ◽  
Capital Structure ◽  
Stock Returns ◽  
Financial Constraints ◽  
Stock Exchange ◽  
Cash Flows ◽  
Total Asset ◽  
Cash Holding ◽  
The Relationship

This paper examines the relationship between financial constraints and the stock returns explaining the pricing of stock through financially constrained and unconstrained firms in Pakistan. Three proxies; total assets, tangible to total assets and cash holding to total assets ratios) have been used for financial constraints and the study tried to investigate that either the investors are compensated for taking the extra risk or not in Pakistan Stock Exchange (PSX). We find that the financially constrained firms don’t earn higher returns when their capital structure is heavy with liquid assets and their cash flows are more than the unconstrained firms in PSX. Moreover, the time series results showed that the risk-adjusted returns of the most constrained firms give the mix and somewhat negative and significant and insignificant results for the Pakistani firms listed in PSX sorted based on tangible to total assets and Cash holding to total asset ratios. Keywords: Asset Pricing, Financial constraints, risk-adjusted performance of portfolios

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