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Effects of debt collection practices on loss given default

  • Han, Chulwoo
  • Jang, Youngmin
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    In this article, we propose an LGD model that is solely based on legal and internal debt collection actions. Our model is supported by empirical tests in which it performs better than a usual firm specific model. This result is noteworthy when we recall that the model has only binary variables that indicate whether an action was taken. Our model can be applied to update the LGD of distressed firms in a timely manner reflecting the actions taken during the debt collection period. It also can be used to assess the effect of a recovery action and to determine whether to apply an action to certain types of debt.

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    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 37 (2013)
    Issue (Month): 1 ()
    Pages: 21-31

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    Handle: RePEc:eee:jbfina:v:37:y:2013:i:1:p:21-31
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    1. Esa Jokivuolle & Samu Peura, 2003. "Incorporating Collateral Value Uncertainty in Loss Given Default Estimates and Loan-to-value Ratios," European Financial Management, European Financial Management Association, vol. 9(3), pages 299-314.
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    3. Qi, Min & Zhao, Xinlei, 2011. "Comparison of modeling methods for Loss Given Default," Journal of Banking & Finance, Elsevier, vol. 35(11), pages 2842-2855, November.
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    5. Bastos, João A., 2010. "Forecasting bank loans loss-given-default," Journal of Banking & Finance, Elsevier, vol. 34(10), pages 2510-2517, October.
    6. Christian Gourieroux & Alain Monfort, 2006. "(Non) consistency of the Beta Kernel Estimator for Recovery Rate Distribution," Working Papers 2006-31, Centre de Recherche en Economie et Statistique.
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    8. Bonfim, Diana & Dias, Daniel A. & Richmond, Christine, 2012. "What happens after corporate default? Stylized facts on access to credit," Journal of Banking & Finance, Elsevier, vol. 36(7), pages 2007-2025.
    9. Dermine, J. & de Carvalho, C. Neto, 2006. "Bank loan losses-given-default: A case study," Journal of Banking & Finance, Elsevier, vol. 30(4), pages 1219-1243, April.
    10. Papke, Leslie E & Wooldridge, Jeffrey M, 1996. "Econometric Methods for Fractional Response Variables with an Application to 401(K) Plan Participation Rates," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(6), pages 619-32, Nov.-Dec..
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    12. Olivier RENAULT & Olivier SCAILLET, 2003. "On the Way to Recovery: A Nonparametric Bias Free Estimation of Recovery Rate Densities," FAME Research Paper Series rp83, International Center for Financial Asset Management and Engineering.
    13. Calabrese, Raffaella & Zenga, Michele, 2010. "Bank loan recovery rates: Measuring and nonparametric density estimation," Journal of Banking & Finance, Elsevier, vol. 34(5), pages 903-911, May.
    14. Acharya, Viral V. & Bharath, Sreedhar T. & Srinivasan, Anand, 2007. "Does industry-wide distress affect defaulted firms? Evidence from creditor recoveries," Journal of Financial Economics, Elsevier, vol. 85(3), pages 787-821, September.
    15. Radovan Chalupka & Juraj Kopecsni, 2008. "Modelling Bank Loan LGD of Corporate and SME Segments: A Case Study," Working Papers IES 2008/27, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Nov 2008.
    16. Grunert, Jens & Weber, Martin, 2009. "Recovery rates of commercial lending: Empirical evidence for German companies," Journal of Banking & Finance, Elsevier, vol. 33(3), pages 505-513, March.
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