Predicting corporate credit risk: Network contagion via trade credit

Trade credit is a payment extension granted by a selling firm to its customer. Companies typically respond to late payments from their customers by delaying payments to suppliers, thus generating a ripple through the transaction network. Therefore, trade credit is as a potential vehicle of propagation of losses in case of default events. The goal of this work is to leverage information on the trade credit among connected firms to predict imminent defaults of firms. We use a unique dataset of client firms of a major Italian bank to investigate firm bankruptcy between October 2016 to March 2018. We develop a model to capture network spillover effects originating from the supply chain on the probability of default of each firm via a sequential approach: the output of a first model component on single firm features is used in a subsequent model which captures network spillovers. While the first component is the standard econometrics way to predict such dynamics, the network module represents an innovative way to look into the effect of trade credit on default probability. This module looks at the transaction network of the firm, as inferred from the payments transiting via the bank, in order to identify the trade partners of the firm. By using several features extracted from the network of transactions, this model is able to predict a large fraction of the defaults, thus showing the value hidden in the network information. Finally, we merge firm and network features with a machine learning model to create a ‘hybrid’ model, which improves the recall for the task by almost 20 percentage points over the baseline.

Do Women Directors Improve Firm Performance and Risk in India?

We examine board diversity in India following a 2013 law requiring all public companies to have at least one female board member. Our results indicate that having women on the board of directors improves firm performance and reduces firm bankruptcy risk. Using data on directors’ backgrounds and social connections, we find that important factors include female directors’ independence, social network size, committee memberships, and graduate education. Our results hold after addressing endogeneity using instrumental variable (IV) and difference-in-differences (DID) approaches.

Factors Affecting Bankruptcy in Malaysian Listed Companies

In a number of studies bankruptcy has been known to bring about the downfall and embarrassment of firms as well as destroying a lot of careers. On the other hand for bankruptcy of corporate institutions, factors such as accounting aspects that include, profitability, leverage as well as liquidity are mainly the core of this issue as mentioned by Boettcher, Cavanagh, and Xu (1). Nowadays corporate governance has been added into the mix. In order to support both affected and smoothly running firms, it is crucial for researchers to investigate all the aspects of the management of the firm as expressed in their annual reports. The methods focused on in this research includes the models such as, multicollinearity, polled least square model and finally the fixed effect model. The annual reports and indexes were used to get values in the measurements. This study found that corporate governance, firm size and profitability were not significant to the bankruptcy of the firm. However, Liquidity and leverage contributed to firm bankruptcy. In conclusion, this study is generally meant to explore the impact of different factors that probably contributed to bankruptcy among Malaysian firms.

The cost of debt and the characteristics of audit firms

Purpose Audit firm bankruptcy can have significant negative impacts on the stock prices of client firms. The purpose of this paper is to identify determinants of audit firm bankruptcy risk as measured by costs of debt. Design/methodology/approach Using audit firm data publicly available in Korea, this study empirically examines whether client portfolio, financial, and organizational characteristics are associated with the weighted average interest rates assumed by auditors. Findings The authors find empirical evidence that audit firms’ client portfolio characteristics, including the incidence (or number) of lawsuits against the auditor, the proportion of audit clients under surveillance, the proportion of initial audit engagements, and the proportion of listed companies of audit clients, are positively associated with the cost of debt. The authors also find several financial and organizational characteristics associated with the cost of debt. Practical implications The findings of this study suggest that client portfolio characteristics as well as financial and organizational characteristics are important determinants of the cost of debt in audit firms, and that these characteristics are different from those of firms in other industries. Identifying the determinants of audit firms’ cost of debt provides insight to regulators, client firms, and capital market participants. Originality/value This study examines the default risk of audit firms that play an important monitoring role in capital markets. By utilizing unique data about audit firms available in Korea, this study is the first study to empirically examine the effect of detailed audit firm characteristics on audit firm’s default risk.

BUBBLES, CRASHES, AND THE FINANCIAL CYCLE: THE IMPACT OF BANKING REGULATION ON DEEP RECESSIONS

This paper explores how different credit market and banking regulations affect business fluctuations. Capital adequacy- and reserve requirements are analyzed for their effect on the risk of severe downturns. We develop an agent-based macroeconomic model in which financial contagion is transmitted through balance sheets in an endogenous firm-bank network, which incorporates firm bankruptcy and heterogeneity among banks to capture the fact that contagion effects are bank specific. Using concepts from the empirical literature to identify amplitude and duration of recessions and expansions, we show that more stringent liquidity regulations are best to dampen output fluctuations and prevent severe downturns. Under such regulations, both leverage along expansions and amplitude of recessions become smaller. More stringent capital requirements induce larger output fluctuations and lead to deeper, more fragile recessions. This indicates that the capital adequacy requirement is procyclical and therefore not advisable as a measure to prevent financial contagion.