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 The Resilience of Non-Sharia Compliant Company in Indonesia Stock Exchange (IDX) and its Determinants: Evidence from 2005-2013

INFERENSI ◽  
2018 ◽  
Vol 11 (2) ◽  
pp. 269-290
Author(s):  
Ibnu Qizam ◽  
Misnen Ardiansyah ◽  
Abdul Qoyum
Keyword(s):  
Default Risk ◽  
Prediction Models ◽  
Stock Exchange ◽  
Company Size ◽  
Default Prediction ◽  
Distance To Default ◽  
Lagged Dependent Variable ◽  
Specific Factors ◽  
The Impact ◽  
Profitability Ratios

The aims of this study were to examine the resilience of non-sharia stock in Indonesia, to measure the impact of macro-economic variables and micro-company specific factors toward resilience. All the data, including 30 non-sharia companies in Indonesia, are retrieved from Indonesia Stock Exchange and Bloomberg database. Our dataset spans from 2005 to 2013, the study employs GMM Estimation Approach to estimate the determinants of company’s resilience in Indonesia. The results find that profitability ratios (ROE, ROIC, NIM), liquidity ratio (CASHR, CURR), debt asset ratio, and lagged dependent variable (Mertonit-1) are found to be statistically significant determinants of Merton distance-to-default. The company size is not a good predictor of the default risk for companies observed. This study emphasizes the benefits of using several accounting-based measures in company-default prediction models. 

scholarly journals The Impact of Corporate Governance Characteristics on the of Financial Distress

2016 ◽  
Vol 3 (2) ◽  
pp. 162
Author(s):  
Mahdi Filsaraei ◽  
Reza Jarrahi Moghaddam
Keyword(s):  
Corporate Governance ◽  
Board Of Directors ◽  
Financial Distress ◽  
Financial Statements ◽  
Multivariate Regression Analysis ◽  
Company Stock ◽  
Governance Indicators ◽  
The Board Of Directors ◽  
Qualified Audit Opinion ◽  
The Impact

Given the importance of corporate governance for increasing the monitoring of company operations, i.e., reducing information asymmetry and increasing control over operations, in this study, we investigate some indicators of corporate governance and financial distress as one of the most important criteria in the decisions of the users of financial statements. Corporate governance Indicators that have been mentioned in this study, including the independence of the board of directors (the ratio of non-executive members), institutional investors and duality of CEO and Chairman of the Board of Directors. This study is applied research and the required information is gathered from financial statements of listed companies on the TSE. Using a sample of 82 company stock during the period 2010-2014 and multivariate regression analysis, the results of the analysis of information gathered indicates that institutional ownership reduces the financial distress. However, there was no significant relationship between board independence (proportion of outside board members) and the duality of CEO and Chairman of the Board with the financial distress. The results also indicate that financial leverage and a qualified audit opinion increases financial distress and firm size and management performance reduces it.

scholarly journals Empirics of Korean Shipping Companies’ Default Predictions

Risks ◽  
2021 ◽  
Vol 9 (9) ◽  
pp. 159
Author(s):  
Sunghwa Park ◽  
Hyunsok Kim ◽  
Janghan Kwon ◽  
Taeil Kim
Keyword(s):  
Logit Model ◽  
Prediction Models ◽  
Predictive Ability ◽  
Financial Ratios ◽  
Probability Of Default ◽  
Shipping Industry ◽  
Market Participants ◽  
Korean Economy ◽  
Default Prediction ◽  
Financial Characteristics

In this paper, we use a logit model to predict the probability of default for Korean shipping companies. We explore numerous financial ratios to find predictors of a shipping firm’s failure and construct four default prediction models. The results suggest that a model with industry specific indicators outperforms other models in predictive ability. This finding indicates that utilizing information about unique financial characteristics of the shipping industry may enhance the performance of default prediction models. Given the importance of the shipping industry in the Korean economy, this study can benefit both policymakers and market participants.

Possibilities and limitations of the use of bankruptcy prediction models for insolvency prevention

2021 ◽  
pp. 73-94
Author(s):  
Olga Lvova
Keyword(s):  
Financial Reporting ◽  
Financial Distress ◽  
Financial Stability ◽  
Prediction Models ◽  
Organizational Factors ◽  
Bankruptcy Prediction ◽  
Operating Conditions ◽  
Advantages And Disadvantages ◽  
Qualitative Variables ◽  
The Impact

The paper provides the solution to the problem of an integrated classification of existing bankruptcy prediction based on the content analysis of 270 relevant foreign and Russian publications issued within a period of 1910-2020. The author identifies two main groups of models– normative and positive, with the latter categorized into expert, mixed and objective including traditional statistical models and artificial intelligent techniques; and considers the specific features of certain predicting models, their advantages and disadvantages. He then reveals the economic content of such models and the set of ratios applied for identifying company’s financial distress with the following conclusions: approaches to the variables selection are rarely justified, indicators are usually borrowed from previous models or generated automatically by the database configuration; the accounting approach to bankruptcy forecasting based on financial ratios prevails and has serious limitations for Russian companies; the most significant market, value and qualitative variables indicating a decline in the business financial stability are highlighted. Significant limitations of the general use of bankruptcy prediction models for making decisions aimed at insolvency prevention are identified: the inability to anticipate the impact of informal factors that are irregular, unable to extrapolate, and affect companies in different ways; the need to take into account the economic conditions of the national economy, financial reporting standards, and the level of availability of diverse data; the impossibility of creating a universal indicative basis to identify decline of sustainability of any business due to the high volatility of operating conditions in Russia. Bayesian methods and nowcasting, as well as the development of forecasting models for certain industries, are promising areas for the development of modern approaches to bankruptcy prediction, but the fundamental activity for preventing insolvency is not forecasting by models, but the implementation of continuous monitoring of the overall business performance in relation to influencing market, operational, investment, financial, managerial and organizational factors, taking into account significant qualitative variables.

scholarly journals Dewan Komisaris Independen sebagai Pemoderasi Pengaruh Financial Distress pada Kecepatan Publikasi Laporan Keuangan

2018 ◽  
pp. 2204
Author(s):  
Ni Putu Wanda Anggeliana Putri ◽  
Yenni Latrini
Keyword(s):  
Financial Distress ◽  
Sampling Technique ◽  
Financial Statements ◽  
Financial Statement ◽  
Financial Report ◽  
Asymmetry Of Information ◽  
The Public ◽  
Analysis Technique ◽  
The Impact ◽  
Positive Effect

Financial statement is an important instrument, because it can reduce the asymmetry of information that occurs between companies and the public. The velocity of publication of the financial statements may affect the users trust in the financial statements, this is because the information contained in the financial statements is required by the user to  take an economic decision. The purpose of this study is to prove empirically and explain the impact of financial distress on the velocity of publication of financial statements with independent board of commissioners as a moderator variabel. This research was conducted at company of consumer goods industry sector which listed in Bursa Efek Indonesia in 2012-2016. The samples of research taken with non probability sampling method with purposive sampling technique, so that obtained sample of 22 companies with 110 observation. Moderate Regression Analysis is a data analysis technique to obtain the results, the result of research is financial distress have positive effect on the velocity of publication of financial report and independent board of commissioner weaken the effect of financial distress on the velocity of publication of financial statement. Keywords: independent commissioners, financial distress, velocity of publication of the financial statements

scholarly journals COVID-19 pandemic risk and probability of loan default: evidence from marketplace lending market

2021 ◽  
Vol 7 (1) ◽  
Author(s):  
Asror Nigmonov ◽  
Syed Shams
Keyword(s):  
Financial Markets ◽  
Financial Distress ◽  
Default Risk ◽  
Sample Selection ◽  
Probability Of Default ◽  
Loan Default ◽  
Economic Distress ◽  
Logit Regression ◽  
Low Levels ◽  
The Impact

AbstractAs the COVID-19 pandemic adversely affects the financial markets, a better understanding of the lending dynamics of a successful marketplace is necessary under the conditions of financial distress. Using the loan book database of Mintos (Latvia) and employing logit regression method, we provide evidence of the pandemic-induced exposure to default risk in the marketplace lending market. Our analysis indicates that the probability of default increases from 0.056 in the pre-pandemic period to 0.079 in the post-pandemic period. COVID-19 pandemic has a significant impact on default risk during May and June of 2020. We also find that the magnitude of the impact of COVID-19 risk is higher for borrowers with lower credit ratings and in countries with low levels of FinTech adoption. Our main findings are robust to sample selection bias allowing for a better understanding of and quantifying risks related to FinTech loans during the pandemic and periods of overall economic distress.

The Impact of Auditors' Opinions, Macroeconomic and Industry Factors on Financial Distress Prediction: An Empirical Investigation

2009 ◽  
Vol 12 (03) ◽  
pp. 417-454 ◽  
Author(s):  
Bi-Huei Tsai ◽  
Cheng-Few Lee ◽  
Lili Sun
Keyword(s):  
Financial Distress ◽  
Financial Statements ◽  
Macroeconomic Factors ◽  
Financial Ratio ◽  
Financial Distress Prediction ◽  
Distress Prediction ◽  
Market Factors ◽  
The Impact ◽  
Better Than

This study investigates the usefulness of auditors' opinions, market factors, macroeconomic factors, and industry factors in predicting financial distress of Taiwanese firms. Specifically, two non-traditional auditors' opinions are evaluated: "long-term investment audited by other auditors" ("other auditor"), and "realized investment income based on non-audited financial statements" ("no auditor").The results of the 22 discrete-time hazard models show that "other auditor" opinions have incremental contribution in predicting financial distress, in addition to "going concern" opinions. This suggests that "other auditor" opinions possess higher risk of overstating earnings and firms with such income items are more likely to fail. Besides, we find that the macroeconomic factors studied significantly explain financial distress. Particularly, the survivals of electronic firms are more sensitive to earnings due to higher earnings fluctuations in such firms. Finally, models with auditors' opinions, market factors, macroeconomic factors, and industry factors perform better than the financial ratio-only model in financial distress prediction.

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.

scholarly journals Stakeholders and Long-Term Sustainability of SMEs. Who Really Matters in Crisis Contexts, and When

2019 ◽  
Vol 11 (23) ◽  
pp. 6551 ◽  
Author(s):  
Manzaneque-Lizano ◽  
Alfaro-Cortés ◽  
de la Priego Cruz
Keyword(s):  
Financial Distress ◽  
Conceptual Models ◽  
Prediction Models ◽  
Classification Tree ◽  
Failure Process ◽  
Business Failure ◽  
Crisis Events ◽  
The Impact

The impact of crises on the long-term sustainability of small and medium-sized enterprises (SMEs) has been attracting growing interest in the literature and from governments due to the significance of such companies with respect to economic growth, innovation, and employment. Although failure prediction models have been proposed based on accounting and other qualitative information, little is known regarding the influence of stakeholders on the failure process of SMEs. From the perspective of long-term sustainability, this article analyzes the role of the financial influence of stakeholders on the likelihood of business failure. An empirical study was carried out on a sample of 2352 Spanish SMEs, examining the differences between failed and non-failed SMEs and using a classification tree methodology to investigate the role played by each type of stakeholder in overcoming crisis events. The study provides empirical evidence regarding the relative importance of stakeholders to SMEs under conditions of financial distress, and proposes their categorization on the basis of their control over firms’ financial resources. Specifically, the analysis reveals that the capacity of the firm to generate sustainable wealth over time and to overcome critical situations is dependent on the most critical stakeholders. Workers, customers, and suppliers are the most important in ensuring the long-term sustainability of SMEs during the first stages of a crisis. Following the initial operational problems, other creditors (financial institutions) become relevant. In this sense, the results of this study encourage firms and governments to develop cooperation strategies with stakeholders (co-responsibility) in line with the proposed conceptual models of business sustainability.

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