APRA's Expert Judgment Ratings and Solvency Cover of Australian General Insurers

The Australian Prudential Regulation Authority's (APRA's) supervisors use expert judgment to rate the risk of failure of general insurers (GIs). Using statistical data, we model the determinants of GI ratings and solvency cover and find: (1) sufficient predictive power in statistical data to identify GIs for earlier review and assist in quality assurance of APRA's ratings and (2) that profitability, solvency cover, investment, and underwriting risk play different roles in rating foreign branch and Australian-incorporated GIs. We conclude that supervisors generally correctly incorporate our a priori expectations of the effects of risk indicators on GI risk into their ratings.     

Financial Distress in the Great Depression

We use firm‐level data to study corporate performance during the Great Depression era for all industrial firms on the NYSE. Our goal is to identify the factors that contribute to business insolvency and valuation changes during the period 1928‐1938. We find that firms with more debt and lower bond ratings in 1928 became financially distressed more frequently during the Depression, consistent with the trade‐off theory of leverage and the information production role of credit rating agencies. We also document for the first time that firms responded to tax incentives to use debt during the Depression era but that the extra debt used in response to this tax‐driven “debt bias” did not contribute significantly to the occurrence of distress. Finally, we conduct an out‐of‐sample test during the recent 2008‐2009 Recession and find that higher leverage and lower bond ratings also increased the occurrence of financial distress during this period.     

Economic Distress, Financial Distress, and Dynamic Liquidation

Many firms emerging from a debt restructuring remain highly leveraged, continue to invest little, perform poorly, and often reenter financial distress. The existing literature interprets these findings as inefficiencies arising from coordination problems among many creditors or an inefficient design of bankruptcy law. In contrast, this paper emphasizes that creditors lack the information that is needed to make quick and correct liquidation decisions. It can explain the long-term nature of financial distress solely as the result of dynamic learning strategies of creditors and suggests that it may be an unavoidable byproduct of an efficient resolution of financial distress.     

Determinants of Financial Distress Costs

This paper provides international evidence on financial distress costs. To achieve this aim, we have developed a model where financial distress costs are determined, on the one hand, by making use of a more accurate indicator of the probability of financial distress and, on the other, by a set of variables that, according to financial theory, explain the magnitude of the costs borne by a firm in the case of financial distress. Our results reveal the relevance of our improved indicator of the probability of financial distress, since it positively affects financial distress costs in all the countries analyzed. Furthermore, since our model controls for the probability of financial distress, we can test the trade-off between the benefits and costs of debt. This allows us to verify that the benefits debt outweigh the costs. Our results also indicate that distress costs are negatively related to liquid assets; hence, their benefits more than offset their opportunity costs.     

Financial Distress and Corporate Performance

This study finds that highly leveraged firms lose substantial market share to their more conservatively financed competitors in industry downturns. Specifically, firms in the top leverage decile in industries that experience output contractions see their sales decline by 26 percent more than do firms in the bottom leverage decile. A similar decline takes place in the market value of equity. These findings are consistent with the view that the indirect costs of financial distress are significant and positive. Consistent with the theory that firms with specialized products are especially vulnerable to financial distress, we find that highly leveraged firms that engage in research and development suffer the most in economically distressed periods. We also find that the adverse consequences of leverage are more pronounced in concentrated industries.     

当代大学生财务困境与理财指引

文章剖析了当代大学生的财务现状和面临的财务困境,提出了大学阶段的理财目标和实施的建议。通过理性地、有计划地消费进行节流,通过创建多元化收入来源体系进行开源,从而保持健康的财务状况,并养成良好的理财习惯,最终提高财商。     

Financial Distress and Bank Lending Relationships

We use a unique data set of bank loans to examine the wealth effects on lead lending banks when their borrowers suffer financial distress. We find a significant negative announcement return for the lead lending bank when a major corporate borrower announces default or bankruptcy. Banks with higher exposure to the distressed firm have larger negative announcement-period returns. The existence of a past lending relationship with the distressed firm results in larger wealth declines for the bank shareholders. Finally, financial distress also has a significant negative effect on borrower's returns.     

The Risk-Adjusted Cost of Financial Distress

Financial distress is more likely to happen in bad times. The present value of distress costs therefore depends on risk premia. We estimate this value using risk‐adjusted default probabilities derived from corporate bond spreads. For a BBB‐rated firm, our benchmark calculations show that the NPV of distress is 4.5% of predistress value. In contrast, a valuation that ignores risk premia generates an NPV of 1.4%. We show that marginal distress costs can be as large as the marginal tax benefits of debt derived by Graham (2000) . Thus, distress risk premia can help explain why firms appear to use debt conservatively.     

Foreign Exchange Exposure Elasticity and Financial Distress

Financially distressed firms have limited ability to manage exchange rate exposure over time which could cause their fundamental value to be sensitive to the cash flow volatility related to currency movements. Accordingly, we hypothesize that the likelihood and costs of financial distress help explain cross‐sectional variations in return sensitivity to currency movements. We find that the level of exchange rate exposure elasticity is related to proxies for the likelihood of financial distress, growth opportunities, and product uniqueness. Further, firms with a greater likelihood and higher costs of financial distress exhibit greater abnormal returns in response to large exchange rate shocks.     

基于经济附加值的上市公司财务困境预警实证研究

经济附加值(EVA)是从税后净营业利润中扣除包括股权和债务的所有资金成本后的经济利润.将经济附加值指标应用于我国上市公司的财务困境预警实证研究和行业业绩分析,取得了较好的判别预测效果,并在此基础上提出了相应的政策建议,以进一步深化公司价值最大化的理念和提升上市公司的整体业绩.     

CDS and the Resolution of Financial Distress

The dramatic growth of Credit Default Swaps (CDS)—contracts that allow creditors to hedge their default exposure or take leveraged credit positions—threatens to complicate the resolution of financial distress in ways that existing reorganization methods and institutions have yet to adapt to. CDS contracts undermine a major premise that underlies current reorganization methods—namely, that the holder of legal rights has, and is motivated by, corresponding economic interests. Because hedging in the CDS markets immunizes creditors from the debtor's financial condition, they effectively separate their legal rights and economic interests. In this article, the authors discuss the challenges this separation poses for the resolution of distress both in and out of bankruptcy, and consider ways in which “on‐ground” realities may be reconciled with the legal structure that underlies the resolution of distress. At a minimum, disclosure of CDS positions in times of financial distress—along the lines of the disclosures presently required of equity investors under the Williams Act—are an essential first step toward a solution.     

Introducing Recursive Partitioning for Financial Classification: The Case of Financial Distress

The purpose of this study is to present a new classification procedure, Recursive Partitioning Algorithm (RPA), for financial analysis and to compare it with discriminant analysis within the context of firm financial distress. RPA is a computerized, nonparametric technique based on pattern recognition which has attributes of both the classical univariate classification approach and multivariate procedures. RPA is found to outperform discriminant analysis in most original sample and holdout comparisons. We also observe that additional information can be derived by assessing both RPA and discriminant analysis results.     

The Political Economy of Distress in East Asian Financial Institutions

The 1997–1999 East Asian crisis is an interesting case for studying the determinants of distress and closure of financial institutions. Of a sample of 283 financial institutions from Indonesia, Korea, Malaysia, the Philippines, and Thailand, 120 experienced distress, and by July 1999, 38 were closed. We find that traditional, CAMEL-type financial data for 1996 help predict distress and closure. Connections—with industrial groups or influential families—increased the likelihood of distress, however, suggesting that supervisors had granted selective prior forbearance from prudential regulations. Since closure was more, not less, likely with connections, the closure processes themselves appear transparent. We also find evidence of too big to fail policies.     

An Empirical Analysis of Thomas's Financial Accounting Allocation Fallacy Theory in a Financial Distress Context

Thomas (1969, 1974 and 1975) theoretically attacked the practice of incorporating major accounting allocations across time such as depreciation and deferred taxes in financial accounting. Instead, he advocated using accrual-based funds statements as alternatives to an income statement (preferably a net-quick-assets funds statement). This paper reports the results of analyses of Thomas's assertions by using the predictive ability criterion, and the ordinal four-state financial distress methodology developed by Ward (1994). Results generally support Thomas's assertions. A net-quick-assets operating flow and an operating flow variable adjusted for depreciation and amortisation and deferred tax allocations are both normally stronger predictors of financial distress than a net income variable. However, contrary to Thomas's theory, the change in inventory, a non-monetary item, appears to be an important predictor of financial distress one year before distress.     

Estimating Risk‐Adjusted Costs of Financial Distress

The search for the optimal, or value‐maximizing, capital structure involves weighing the expected benefits of higher leverage against the expected “costs of financial distress.” These costs include not only the direct costs of reorganization, but less quantifiable effects of financial trouble such as damage to the firm's reputation, the loss of key employees and customers, and the loss of value from forgone investment opportunities. This article proposes a new method for valuing expected financial distress costs. While researchers have provided estimates of the costs associated with financial distress when it takes place, whether or when these costs will be incurred is, of course, unknown at the time the financing decision. As a result, the “correct” discount rate for valuing expected distress costs is difficult to derive. Instead of adjusting the discount rate to reflect historical default rate probabilities, the authors' method uses “risk‐neutral” probabilities of encountering distress that allow for discounting at the risk‐free rate. The risk‐neutral probabilities of default are derived by incorporating the systematic risk premia implicit in corporate bond yield spreads. This method results in a significant increase in estimates of financial distress costs. In a simple example presented by the authors, distress costs estimated at about 1.6% of firm value using the conventional method turn out to run about 5% after adjusting for the increased systematic risk associated with financial distress.     

CEO风险偏好、财务困境与企业违规

CEO作为企业战略决策的首席执行官,其自身的认知基础、风险偏好等个人特质会通过影响组织决策与战略布局进而影响企业行为.为此,基于高层梯队理论和舞弊三角理论,以2010-2018年沪深A股上市企业为研究样本,实证检验C EO风险偏好、财务困境与企业违规倾向的关系.结果表明:由风险偏好型C EO任职的企业违规倾向更高,企业财务困境对主效应具有调节作用.     

Predicting Corporate Financial Distress: A Time-Series CUSUM Methodology

The ability to predict corporate financial distress can be strengthened using models that account for serial correlation in the data, incorporate information from more than one period and include stationary explanatory variables. This paper develops a stationary financial distress model for AMEX and NYSE manufacturing and retailing firms based on the statistical methodology of time-series Cumulative Sums (CUSUM). The model has the ability to distinguish between changes in the financial variables of a firm that are the result of serial correlation and changes that are the result of permanent shifts in the mean structure of the variables due to financial distress. Tests performed show that the model is robust over time and outperforms similar models based on the popular statistical methods of Linear Discriminant Analysis and Logit.     

Theory and Evidence on the Resolution of Financial Distress

We analyze a financially distressed owner-managed project. Themain results of the model are: (1) borrower default is an endogenousresponse to the anticipated restructuring–foreclosureoutcome; (2) the lender’s restructuring–foreclosuredecision depends critically on the interaction between projectvalue and industry liquidity; and (3) the lender waits for theindustry to recapitalize before selling assets obtained throughforeclosure. Empirical analysis of a large sample of defaultedcommercial real estate loans supports many of the model predictions,including restructuring–foreclosure outcomes that areconsistent with endogenous borrower default and firesale discountsthat vary depending on industry market conditions at the timeof foreclosure. (JEL G33)     

财务困境成本理论与实证研究综述

本文对财务困境成本的存在性、分类、计量以及经验估计等相关理论和实证研究进行综合评述,最后探讨财务困境成本的未来研究方向,指出基于公司财务特征、公司治理和股权结构等多维视角研究财务困境成本的影响因素,并提出构建预期财务困境成本指数具有理论意义和应用价值。