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The crash of global financial markets is evident of the Corona Virus Disease 2019 (COVID-19) led economic recession shaping into an imminent financial crisis now. The identification of firms prone to default in such crisis in important to keep the investors confiding in the financial markets. This study presents a hybrid model to preemptively identify the financially distressed firms which are expected to default. The hybrid model has been constructed by infusion of accounting variables into and option based financial model, hence seeing the default phenomenon in a hindsight as well as foresight. A sample of 30 housing sector firms listed at New York Stock Exchange (NYSE. Area Under Curve (AUC) methodology has been used to evaluate the results of the hybrid model. The results show that the proposed hybrid model has the highest AUC in comparison with either of accounting information or option based model, alone. The study concludes at a comparatively better ability of the hybrid model in anticipating financial stress among the firms and recommends the same to be used for identification of firms prone to default. An out of sample testing of the proposed hybrid model has been mentioned as the future research to evaluate its efficacy out of the restrictive assumptions of this study.
KHALID MUMTAZ KHAN. (2020) Corporate Distress Prediction Using a Hybrid of Accounting and Option Based Model, International Review of Management and Business Research, Volume 9, Issue 4 .
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