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Using option theory and fundamentals to assess the default risk of listed firms

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  • George A. Papanastasopoulos

Abstract

In this paper, we use option based measures of financial performance that utilise market information in a binary probit regression to examine their informational context and properties as distress indicators and to estimate default probabilities for listed firms. We then enrich them with fundamentals that utilise accounting information. The results suggest that, by adding accounting information from financial statements to market information from equity prices, we can improve both in sample fitting and out of sample predictability of defaults. Therefore, option theory does not generate sufficient statistics of the actual default frequency. Our main conclusion is that, while market information can be extremely valuable, it is most useful when coupled with accounting information in assessing the default risk of listed firms.

Suggested Citation

  • George A. Papanastasopoulos, 2007. "Using option theory and fundamentals to assess the default risk of listed firms," International Journal of Accounting, Auditing and Performance Evaluation, Inderscience Enterprises Ltd, vol. 4(3), pages 305-331.
    • Handle: RePEc:ids:ijaape:v:4:y:2007:i:3:p:305-331
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    Cited by:

    1. Rungporn Roengpitya & Pratabjai Nilla-or, 2012. "Challenges on the Validation of PD Models for Low Default Portfolios (LDPs) and Regulatory Policy Implications," Working Papers 2012-02, Monetary Policy Group, Bank of Thailand.
    2. Rungporn Roengpitya, 2012. "Proposal of New Hybrid PD Estimation Models for the Low Default Portfolios (LDPs), Empirical Comparisons and Policy Implications," Working Papers 2012-03, Monetary Policy Group, Bank of Thailand.

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