Publication: Performance of default-risk measures: the sample matters
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AEI/Plan Estatal de Investigación Científica y Técnica y de Innovación 2017-2020/PID2019-104304GB-I00/ES/
AEI/Plan Estatal de Investigación Científica y Técnica y de Innovación 2017-2020/PGC2018-095072-B-I00/ES/
Abstract
This paper examines the predictive power of the main default-risk measures used by both academics and practitioners, including accounting measures, market-price-based measures and the credit rating. Given that some measures are unavailable for some firm types, pair wise comparisons are made between the various measures, using same-size samples in every case. The results show the superiority of market-based measures, although their accuracy depends on the prediction horizon and the type of default events considered. Furthermore, examination shows that the effect of within-sample firm characteristics varies across measures. The overall finding is of poorer goodness of fit for accurate default prediction in samples characterised by high book-to-market ratios and/or high asset intangibility, both of which suggest pricing difficulty. In the case of large-firm samples, goodness of fit is in general negatively related to size, possibly because of the 'too-big-to-fail' effect.
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© 2020 Elsevier B.V. This manuscript version is made available under the CC-BY-NC-ND 4.0
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