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Examining what best explains corporate credit risk: accounting-based versus market-based models

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Author Info

  • Antonio Trujillo-Ponce

    ()
    (Department of Financial Economics and Accounting, Pablo de Olavide University, Seville, Spain)

  • Reyes Samaniego-Medina

    ()
    (Department of Financial Economics and Accounting, Pablo de Olavide University, Seville, Spain)

  • Clara Cardone-Riportella

    ()
    (Department of Business Administration, Universidad Carlos III de Madrid)

Abstract

Using a sample of 2,186 credit default swap (CDS) spreads quoted in the European market during the period 2002-2009, this paper empirically analyzes which model – accounting- or market-based – better explains corporate credit risk. We find that there is little difference in the explanatory power of the two approaches. Our results suggest that both accounting and market data complement one other and thus that a comprehensive model that includes both types of variables appears to be the best option for explaining credit risk. We also show that the explanatory power of accounting- and market-based variables for measuring credit risk is particularly strong during periods of high uncertainty, as experienced in the recent financial crisis, and that it decreases as the CDS contract matures. Finally, the comprehensive model continues to show the best results when using the credit rating as the proxy for credit risk, but accounting variables currently appear to have a more important role than the market variables

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File URL: http://www.upo.es/serv/bib/fiecac/fiecac1203.pdf
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Bibliographic Info

Paper provided by Universidad Pablo de Olavide, Department of Financial Economics and Accounting (former Department of Business Administration) in its series Working Papers with number 12.03.

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Length: 43 pages
Date of creation: May 2012
Date of revision:
Handle: RePEc:pab:fiecac:12.03

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Keywords: Bankruptcy; credit default swaps; credit risk; distance-to-default;

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References

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Cited by:
  1. Purificacion Parrado-Martinez & Antonio Parta Ureña & Pilar Gomez Fernandez-Aguado, 2014. "Usefulness of Financial Soundness Indicators for risk assessment: The case of EU member countries," Working Papers 14.01, Universidad Pablo de Olavide, Department of Financial Economics and Accounting (former Department of Business Administration).
  2. García-Gallego, Ana & Mures-Quintana, María-Jesús, 2013. "La muestra de empresas en los modelos de predicción del fracaso: influencia en los resultados de clasificación || The Sample of Firms in Business Failure Prediction Models: Influence on Classificati," Revista de Métodos Cuantitativos para la Economía y la Empresa = Journal of Quantitative Methods for Economics and Business Administration, Universidad Pablo de Olavide, Department of Quantitative Methods for Economics and Business Administration, vol. 15(1), pages 133-150, June.

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