Default Risk Of Firms Research Articles

A three-stage prediction model for firm default risk: An integration of text sentiment analysis

Predicting firm default risk is vital for financial institutions to avert significant economic losses, making the enhancement of its prediction precision both imperative and intricate. This research introduces a three-stage prediction model, including association rule algorithm (ARA), support vector machine (SVM) and modified particle swarm optimization algorithm (MPSO). Features selected by ARA are used as inputs for SVM, and penalty parameter and kernel parameter of SVM is optimized by MPSO that uses the adaptive inertia weight. The importance of text sentiment variables are emphasized to predict firm default risk. In the first stage, feature selection seeks to curtail the dimensions of both financial and non-financial variables. The empirical findings validate the efficacy of the ARA, revealing a strong correlation between text sentiment and default risk. The subsequent two stages deploy the SVM, refined by the MPSO, to predict the default risk. Compared with renowned models, the proposed model displays superior prediction precision and a reduced computational overhead. This research furnishes a potent instrument for regulators and firms alike, aiding in mitigating prospective default risks and forestalling broader economic upheavals.

Corporate Social Responsibility and Financial Risk: Exploring Default Risk in Indian Firms

This paper examines the impact of corporate social responsibility (CSR) expenditure on default risk for Indian firms during the period from 2015 to 2021. Using distance to default (DTD) and probability of default (PD) at different time horizons as proxies for default risk, we find that CSR expenditure is negatively related to default risk. This indicates that CSR engagement enhances a firm’s reputation and financial stability, thereby reducing the likelihood of default. Surprisingly, we find that this relationship is less pronounced for group-affiliated firms, as stand-alone firms rely more on CSR to establish market credibility. Our findings highlight the strategic importance of CSR compliance, emphasizing its role in risk management and financial resilience. Our study provides insights for policymakers and managers in emerging economies, underscoring how mandatory CSR can foster a more sustainable and risk-averse corporate environment, particularly for firms without the support of business group affiliation.

ESG Performance and Corporate Default Risk: Do Countries’ Shareholder Protection Levels Affect This Relationship?

This paper explores the nexus between environmental, social, and governance (ESG) performance and corporate default risk. Employing a panel dataset from 1,094 non-financial companies in 21 nations in Europe, corresponding to 9,522 firm-year observations, and using fixed effects estimations, we empirically demonstrate that corporations with higher ESG scores tend to have lower firm default risk. Among the three categories of the ESG score, both the social and the environmental categories participate in this significant association. Moreover, our study presents novel evidence that within ESGs’ ten subcategories, resource use, product responsibility, emissions, human rights, workforce, and CSR strategy significantly reduce firm default risk. Furthermore, country-level shareholder protection moderates the linkage between default risk and ESG performance, such that the negative impact of ESG on default risk is lower for corporations located in nations with higher shareholder protection. Hence, if the countries’ shareholder protection levels are high, stronger ESG would decrease firm default risk by a lesser amount than countries with lower shareholder protection levels. Our findings are robust to alternate variable measurements and alternate methodologies, capturing endogeneity issues.

Do Credit Rating Agencies Learn from the Options Market?

Do credit rating agencies (CRAs) learn from the options market? We examine this question by exploring the relation between options trading activity and credit rating accuracy. We find that as options trading volume increases, credit ratings become more responsive to expected credit risk and exhibit greater ability to predict future defaults. We also find that CRAs rely more on the options market as a source of ratings-related information when firm default risk is higher, options trading is more informative, manager-provided information is of lower quality, and firm uncertainty is higher. Our results are robust to a number of sensitivity tests, including alternative measures of options trading and credit rating accuracy. We reach similar inferences using various approaches to address endogeneity issues, including difference-in-difference analyses and an instrumental variables approach. Overall, our findings are consistent with the view that CRAs incorporate unique information from the options market into their rating decisions which, in turn, improves credit rating accuracy. This paper was accepted by Brian Bushee, accounting. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2023.4980 .

Individualistic culture and firm default risk: Cross‐country evidence

AbstractThis study examines the association between individualistic culture and firm default risk across countries. Using a sample of 15,225 firms across 32 countries over the 2005–2018 period (115,464 firm‐year observations), we find that firms based in countries with high levels of individualism are associated with greater default risk. Our results are robust to a battery of endogeneity and other robustness checks. In additional analyses, we show that risk‐taking behavior is a channel through which individualism impacts firm default risk. We also find that the effect of individualistic culture on firm default risk is weak in countries with stringent bankruptcy laws. Overall, the findings of this study can improve our understanding of the impact of major informal institutions, such as individualistic culture, on manager behavior, which has significant implications for firms operating in global financial markets.

Research on U-shaped relationship between short-term debt for long-term use and supply chain enterprise default risk: Evidence from Chinese listed firms.

This paper empirically investigates the impact mechanism of short-term debt for long-term use and the default risk of supply chain firms with the data of Chinese A-share listed firms from 2007 to 2021. The study shows that there is a significant U-curve relationship between short-term debt for long-term use and supply chain firms' default risk, and too high or too low a level of short-term loans and long-term investments will worsen firms' default risk. In addition, firm performance plays an mediating effect in the process of short-term debt for long-term investment affecting the default risk of supply chain firms. Finally, customer effect and firm heterogeneity play a moderating role in the impact of short-term loans and long-term investments on the default risk of supply chain firms, and the U-shaped relationship will be strengthened under the high-intensity customer effect. This study has important theoretical and practical significance for analyzing the impact of default risk contagion in supply chain enterprises.

The impact of green technology innovation and firm default risk: benefit effect or risk effect?-evidence from the panel data on Chinese manufacturing firms.

In the context of China's strategic goal of carbon neutrality, the realization of green technology innovation to reduce the risk of manufacturing default will help promote the green transformation of firms and achieve high-quality economic development. The study explored the relationship between green technology innovation and default risk by taking the manufacturing industry of listed enterprises in China from 2001 to 2020 as research samples. The results showed that green technology innovation is negatively correlated with default risk. Moreover, the heterogeneity analysis showed that the benefit effect of heavy-polluting enterprises, state-owned enterprises, and large-scale enterprises was more significant. The mechanism analysis showed that green technology innovation can reduce default risk through market position and capital structure. In addition, the study further distinguished that environmental protection tax was conducive to green technology innovation to reduce the occurrence of default risk. In theory, the study expanded the research paradigm between green technology innovation and default risk in theory, and provided new evidence and enlightenment for reducing the default risk of enterprises and supported the green and sustainable development of enterprises in practice.

The impact of ESG on the default risk of family firms: International evidence

This research is focused on studying the relationship between ESG performance and default risk of family firms. The sample consists of the 500 largest family firms worldwide (including all continents) for the period 2015–2021. This study shows a positive and a statistically significant relationship between ESG score and Z-score. This is confirmed for ESG environmental and ESG social scores. We include ownership concentration of family members as well as the percentage of family members in the board of directors. In the first case, we detect a non-linear relationship between ownership concentration and Z-score (inverted U shape) and for the second variable we find a negative relationship between the family participation in the board and Z-score. Finally, financial constraints of family firms reduce the impact of ESG score on Z-score.

Unraveling the impact of climate policy uncertainty on corporate default risk: Evidence from China

This paper examines the effect of climate policy uncertainty (CPU) on corporate default risk based on the comprehensive dataset of Chinese A-listed firms. Based on the empirical study, we document a significant positive impact of China’s CPU on the corporate default risk, and the impact sounds systematically aggravating with the increasing term structure of default investigation. Our research also reveals that R&D investment, ESG performance and firm financial constraints function as effective channels between climate policy uncertainty and firm default risk. Also, better local development and higher managerial climate attention have mitigating effects on the relationship between CPU and corporate default risk, while state ownership intensifies the effect of CPU on corporate default risk. These findings highlight the externality of climate policy risk on corporate default risk profile from the empirical perspective.

Assessing the influence of ESG score, industry, and stock index on firm default risk: A sustainable bank lending perspective

Using a European sample of 211 listed firms from 2013 to 2022, we analyze the mitigation effect on firms’ probability of default (PD) provided by the influence of ESG performance combined with industry and stock index membership. The results show that improvements in environmental scores reduce PD; while firms’ riskiness increases when we control for industry and stock index. From a banking perspective, we encourage a holistic approach integrating ESG scores into lending practices, adjusted by industry or stock index. Policymakers and regulators should support the widespread adoption of ESG metrics in assessing credit risk.

Carbon intensity, default risk, and investors’ attention to environment: Evidence from South Korea

We investigate the relationship between carbon intensity and default risk for South Korean firms and examine the role of investor attentiveness to environmental issues on this relationship. Using carbon emissions and Merton's distance-to-default, we find that carbon intensity is significantly negatively associated with the distance-to-default and that the negative association strengthens when foreign ownership is high. Furthermore, we find that default risk for firms subject to the South Korean emissions trading system increased after its adoption. Our results are robust to different default risk proxies and highlights the negative impact carbon intensity has on default risk for South Korean firms.

Liquidity, informational efficiency and firm default risk: a systematic literature review

Purpose This study aims to systematically review the literature in the fields of liquidity, informational efficiency and default risk. The authors outline the key research streams and provide possible pathways for future research.Design/methodology/approach The study adopts bibliographic mapping to identify the most influential studies in the research fields of liquidity, informational efficiency and default risk from 1984 to 2021.Findings The study identifies four key research themes that include efficiency and transparency of markets; corporate yield spreads; market interactions: bonds, stocks and cryptocurrencies; and corporate governance. By assessing publications published from 2018 to 2021, the authors also document seven key emerging research trends: cross markets, managerial learning and corporate governance, state ownership and government subsidies, international evidence, machine learning (FinTech approaches), environmental themes and financial crisis. Drawing on these emerging trends, the authors highlight the opportunities for future research.Research limitations/implications Keyword searches have limitations since some studies might be overlooked if they do not match the specified search criteria, even though their relevance to the topic is under investigation. Adopt the R project to expand this review by incorporating more literature from other databases, such as the Scopus database could be a possible solution.Practical implications The four key research streams contribute to a comprehensive understanding of liquidity, informational efficiency and default risk. The emerging trends integrate existing knowledge and leave the chance for innovative research to expand the research frontier.Originality/value This study fulfills the systematic literature review streams in the fields of liquidity, informational efficiency and default risk, and provides fruitful opportunities for future research.

Can Firm Digitization Process Improve its Competitiveness?--Based on Resource, Information and Risk Perspectives

Digitization process, as an important means to achieve high-quality economic development, has an important impact for entering the international market. In order to investigate whether the digitization process can improve corporate competitiveness, this paper empirically examines the impact mechanism of digitization process on corporate competitiveness using a sample of A-share listed companies in Shanghai and Shenzhen from 2010 to 2021. The study finds that firms' digitization process can significantly enhance their competitiveness. This finding remains valid after controlling for endogeneity, dynamic effects, and sample selection bias. In terms of the impact mechanism, firm digitization process can promote their competitiveness through the channels of increasing the trade credit financing, improving the information disclosure quality, and reducing the firm default risk.

Does information disclosure and transparency ranking system prevent the default risk of a firm?

A non-financial information disclosure help prevents the default risk of firms. In addition to this point, the channels through the intermediate transmitting process may influence a firm’s default risk. Therefore, we use the regression method and examine listed companies that traded in the Taiwan stock market from 2005 to 2014. The results show that information disclosure significantly negatively affects default risk. Moreover, information transparency can ultimately impact a firm’s default risk via intermediate transmitting channels after considering endogeneity and checking robustness. Our findings suggest constructing full transparency of the information disclosure system will enhance market operations. Particularly, incorporating the laws into regularized information disclosure will improve efficient management and monitoring in the future.

Debt Capital, Default Risk and Financial Performance of Firms

This research aimed to examine the effect of debt capital on firms’ performance in Pakistan. For the purpose of analysis, the study selected a sample of 220 firms from 05 sectors listed at Pakistan Stock Exchange. Debt capital was measured in terms of short term and long term debt to assets ratio. The financial performance was measured through return on assets. Certain other firm level variables were taken as the control variable. Secondary data of the firm level variables were extracted from the annual audited reports and the official website of Pakistan Stock Exchange. The study covered the time span of 2011-2017, examined the effect of debt capital on overall sample firms and then across the firms of different default risk level. For placing the firms in relevant default risk class, the study applied Z-score model. The firms were placed in safe, gray and distress zone on the basis of low, indeterminate and high default risk level, respectively. Panel regression model was used to examine the effect of debt capital on firms’ performance in each scenario. The study only observed the significant effect of long term debt capital for overall firms and the firms placed in safe zone while in other scenarios, it remained negative but insignificant. The study suggested the officials of the firms for taking care in determining the proportion of short term and long term debt capital in the capital structure.

Does carbon emission trading mitigate firm's default risk? Evidence from China

Reducing greenhouse emissions and mitigating the existential threat of climate change for the environment and ecological well-being have become a global consensus. On one hand, facing certain pressure of carbon emission reduction, the default risk of firms may increase due to higher costs of environmental regulations. On the other hand, firms' default risk may decrease as firms' sustainable development could tradeoff the transition costs of firms. Under such uncertain conclusions, we investigate the impact of carbon emissions trading (CET) system in China on firms' default risk. Using panel data of Chinese listed firms during 2010–2019, the difference-in-differences method (DID) is adopted to study the influence of CET on firm's default risk. The results show that the CET significantly reduces the default risk of firms. Further analysis shows that this improvement of firms' financial stability is affected by industrial heterogeneity, external financing constraint heterogeneity and firms' own characteristics such as innovation capacity. Overall, our findings not only expand the economic consequences of environmental regulations, but also provide implications on how to improve the Chinses CET pilot policy and construct a national CET market.

Does fear spur default risk?

While a large body of research documents various firm characteristics and market conditions that drive corporate default, whether risk aversion matters for default risk remains largely under-investigated. A challenge for prior studies that aim to examine the impact of fear on default risk is that investor risk aversion is not an exogenous variable or the presence of omitted variables that drive both risk aversion and default risk. To address endogeneity concerns, we use the 9/11 terrorist attacks, the largest mega-terrorist event, as an exogenous shock to the investor's risk aversion. Our findings show the significantly increased default risks at both market and firm levels following the 9/11 attacks. Terrorism causes an increase in market-wide default risk for firms located in the attacked states and other states. Our findings are consistent with the notion that terrorist attacks increase investors' risk aversion, which triggers an increase in asset volatility, leading to increased default risk.

Corporate social responsibility report readability, credit ratings and cost of borrowing

PurposeThis study aims to investigate how credit rating agencies and banks, important credit market participants, incorporate corporate social responsibility (CSR)-related information in their assessment of firm’s creditworthiness.Design/methodology/approachThe authors collect stand-alone CSR reports published by Fortune 500 companies from 2002 to 2014 and use file size as a readability measure to investigate the impact of stand-alone CSR reports’ readability on firms’ credit ratings and cost of borrowing.FindingsThe authors find that firms with higher CSR report readability enjoy higher credit ratings and lower costs of bank loans, suggesting that rating agencies and banks perceive lower default risk for firms with more readable CSR reports. Further analysis indicates that the positive association between CSR report readability and credit ratings is more pronounced for firms with high CSR performance. Conversely, the negative association between CSR report readability and bank loan spreads is more pronounced for firms with low CSR performance and credit quality, suggesting complementary roles of rating agencies and banks in their use of CSR reports.Originality/valueOverall, the results highlight the importance of improving the textual characteristics of CSR reports, especially readability, in reducing information risk in the credit market.

Uncertainty and corporate default risk: Novel evidence from emerging markets

• We investigate the effects of uncertainty on default risk in 26 emerging markets. • We find a strong and robust evidence that default risk increases with uncertainty. • Channels: risk-taking behavior, cost of debt, cash holdings, financial performance. • The relation between uncertainty and default risk is quantile conditioned. • The influence of uncertainty varies across firm size and stock development. Significant attention has been paid in the literature to the socioeconomic consequences of uncertainty; however, few studies have been devoted to the effects on corporate default risk. This study endeavours to fill this gap by investigating the influence of uncertainty on corporate default risk in the context of 26 emerging markets covering the period 1991–2019. Applying panel estimates, the results are robust and consistent. Uncertainty is positively associated with firm default risk measured by the Distance to Default. Interestingly, the impact of uncertainty tends to be greater for the lowest and highest risk firms. The study further finds that uncertainty is positively associated with firm risk-taking behaviour and the cost of debt, while it is negatively associated with cash holdings and financial performance. These effects play as channels of uncertainty impacting firm default risk. Lastly, the results show that the influence of uncertainty on firm risk is less pronounced for larger firms and firms operating in more developed stock markets.

ESG and Firm's Default Risk

• We investigate the implications of ESG practices of Chinese listed firms on their default risk. • Applying year-by-season and firm fixed effects, we find that higher ESG ratings mitigate firms’ default risk. • The mitigation effect increases as the term structure of default risk increases. • ESG rating's impact on firms’ default risk is smaller for manufacturing firms than non-manufacturing firms. We investigate the implications of ESG practices of Chinese listed firms on their default risk. We explore the relationship between default risk and ESG ratings. Applying year-by-season and firm fixed effects, we find that higher ESG ratings mitigate firms’ default risk. The mitigation effect increases as the term structure of default risk increases. We find that the magnitude of ESG rating's impact on firms’ default risk is smaller for manufacturing firms than non-manufacturing firms. Our findings suggest that credit markets well reflect the ESG practices of firms; investors may improve credit risk management by considering the ESG performances of firms.