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

George A. Papanastasopoulos

    Research output: Contribution to journalArticlepeer-review

    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.

    Original languageEnglish
    Pages (from-to)305-331
    Number of pages27
    JournalInternational Journal of Accounting, Auditing and Performance Evaluation
    Volume4
    Issue number3
    DOIs
    Publication statusPublished - 2007

    Keywords

    • Default risk
    • Fundamentals
    • Option theory

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