In search of default risk predictors in emerging Asia

Abstract

ABSTRACT The study analyses the potential idiosyncratic factors and their pull and push effects on firm-level default risk using 540 listed and traded Asian firms during the period of 2010–2019. The lucrative returns and investment opportunities in Asian markets invites attention for potential research in this domain. Default risk is derived from the Merton model after adjusting for emerging market vulnerabilities. Using fixed-effect panel data regression modelling, we found that higher solvency and operating efficiency are the key pull factors that keep the firms away from default. In the long run, expansion potential and sustainability are key factors that pull the firms out of default. Conversely, a higher level of expansion potential, idiosyncratic volatility and size-effects push low-grade firms towards default despite having a higher level of operating efficiency. We conclude that low-grade firms must therefore keep a close eye on idiosyncratic factors in order to avoid default.