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Performance of default-risk measures: the sample matters

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  • Abinzano, Isabel
  • Gonzalez-Urteaga, Ana
  • Muga, Luis
  • Sanchez, Santiago

Abstract

This paper examines the predictive power of the main default-risk measures used by both academics and practitioners, including accounting measures, market-price-based measures and the credit rating. Given that some measures are unavailable for some firm types, pair wise comparisons are made between the various measures, using same-size samples in every case. The results show the superiority of market-based measures, although their accuracy depends on the prediction horizon and the type of default events considered. Furthermore, examination shows that the effect of within-sample firm characteristics varies across measures. The overall finding is of poorer goodness of fit for accurate default prediction in samples characterised by high book-to-market ratios and/or high asset intangibility, both of which suggest pricing difficulty. In the case of large-firm samples, goodness of fit is in general negatively related to size, possibly because of the “too-big-to-fail” effect.

Suggested Citation

  • Abinzano, Isabel & Gonzalez-Urteaga, Ana & Muga, Luis & Sanchez, Santiago, 2020. "Performance of default-risk measures: the sample matters," Journal of Banking & Finance, Elsevier, vol. 120(C).
    • Handle: RePEc:eee:jbfina:v:120:y:2020:i:c:s0378426620302211
    DOI: 10.1016/j.jbankfin.2020.105959
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    3. Qianbin Feng & Lexin Zhao & Mingxue Xu, 2023. "Tax Incentives and Maturity Mismatch between Investment and Financing: Evidence from China," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 31(4), pages 1-36, July.
    4. Abinzano, Isabel & Corredor, Pilar & Mansilla-Fernández, José Manuel, 2022. "Sovereign debt holdings and banks’ credit risk: Evidence from the Eurozone," Finance Research Letters, Elsevier, vol. 47(PA).
    5. Laura Ballester & Ana Mónica Escrivá & Ana González-Urteaga, 2021. "The Nexus between Sovereign CDS and Stock Market Volatility: New Evidence," Mathematics, MDPI, vol. 9(11), pages 1-23, May.
    6. Zhang, Xuan & Zhao, Yang & Yao, Xiao, 2022. "Forecasting corporate default risk in China," International Journal of Forecasting, Elsevier, vol. 38(3), pages 1054-1070.
    7. Dominika Gajdosikova & Katarina Valaskova & Tomas Kliestik & Maria Kovacova, 2023. "Research on Corporate Indebtedness Determinants: A Case Study of Visegrad Group Countries," Mathematics, MDPI, vol. 11(2), pages 1-30, January.
    8. Ballester, Laura & González-Urteaga, Ana & Martínez, Beatriz, 2020. "The role of internal corporate governance mechanisms on default risk: A systematic review for different institutional settings," Research in International Business and Finance, Elsevier, vol. 54(C).
    9. Abinzano, Isabel & Gonzalez-Urteaga, Ana & Muga, Luis & Sanchez, Santiago, 2022. "Lagged accuracy in credit-risk measures," Finance Research Letters, Elsevier, vol. 47(PA).
    10. Khan, Mohammad Azeem & Ahmad, Wasim, 2022. "Fresh evidence on the relationship between market power and default risk of Indian banks," Finance Research Letters, Elsevier, vol. 46(PA).
    11. Chen, Shen & Chen, Yuran & Zhang, Di & Wang, Jinmei, 2023. "Can minority investor activism promote corporate risk-taking? Evidence from a quasi-natural experiment in China," International Review of Financial Analysis, Elsevier, vol. 85(C).

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    More about this item

    Keywords

    Credit-risk measures; Default prediction; Hard to value stocks;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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