Incorporating the dynamics of leverage into default prediction

Löffler, Günter; Maurer, Alina

doi:10.1016/j.jbankfin.2011.05.015

Cited by 17 publications

(4 citation statements)

References 32 publications

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“…This result seems counter-intuitive since an increase in leverage is usually associated with more risks and more risky behaviors of a bank [Bhagat et al, 2015]. However, there is evidence in the literature that leverage ratios are often mean-reverting [Löffler and Maurer, 2011]. Indeed, banks exhibit a long-run constant leverage ratio, sometimes altered by structural breaks [Koch, 2014].…”

Section: Economic Interpretation Of the Dependence Structurementioning

confidence: 99%

Understanding the Economic Determinants of the Severity of Operational Losses: A Regularized Generalized Pareto Regression Approach

2018

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We investigate a novel database of 10,217 extreme operational losses from the Italian bank UniCredit. Our goal is to shed light on the dependence between the severity distribution of these losses and a set of a set of macroeconomic, financial and firmspecific factors. To do so, we use Generalized Pareto regression techniques, where both the scale and shape parameters are assumed to be functions of these explanatory variables. We perform the selection of the relevant covariates with a state-of-the-art penalized-likelihood estimation procedure relying on L 1 -penalty terms. A simulation study indicates that this approach efficiently selects covariates of interest and tackles spurious regression issues encountered when dealing with integrated time series. Lastly, we illustrate the impact of different economic scenarios on the requested capital for operational risk. Our results have important implications in terms of risk management and regulatory policy.

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Section: Economic Interpretation Of the Dependence Structurementioning

confidence: 99%

Understanding the Economic Determinants of the Severity of Operational Losses: A Regularized Generalized Pareto Regression Approach

2018

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“…Research on finance indicators predicting bankruptcy dates back at least to the 1960s (Altman, 1968;Beaver, 1966), with ongoing interest within the finance literature in models that provide an early warning of failure (Agrawal & Taffler, 2008;Balcaen & Ooghe, 2006;Löffler & Maurer, 2011;Ohlson, 1980). More recent models also combine accounting ratios and market information, such as share prices (Campbell, Hilscher, & Szilagyi, 2008;Wu, Gaunt, & Gray, 2010).…”

Section: Prior Research On Bankruptcy Finance Indicators Predicting Bmentioning

confidence: 99%

Board Capital and the Downward Spiral: Antecedents of Bankruptcy in a Sample of Unlisted Firms

Maere¹,

Jorissen²,

Uhlaner³

2014

Corporate Governance

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Manuscript Type Empirical Research Question/Issue This study examines whether certain proxies for board incentives and board capital are linked with bankruptcy in unlisted firms. Research Findings/Insights Based on data analyzed over a five‐year period with a sample of 232 matched pairs of unlisted firms, results reveal that firms with boards led by an independent Board Chair (vs. CEO duality), and including longer‐tenured directors, and directors with fewer additional directorships on average, are less likely to become bankrupt. Results of analyses of board size and board change support a “reputation” hypothesis, i.e. that directors begin to flee firms in a downward spiral prior to bankruptcy. Theoretical/Academic Implications Results support an eclectic model of board incentives and board capital, which integrates elements of agency and resource dependence theories, and the group decision‐making literature to explain governance antecedents of firms that went bankrupt. It builds on a model proposed by Hillman and Dalziel, while identifying important differences, including lack of support for predicted moderating effects between board incentives and board capital. Findings also support applicability of the threat‐rigidity logic and reputation hypothesis in this context, and the importance of anchoring corporate governance research more precisely on prediction of certain levels of performance. Practitioner/Policy Implications Findings support governance recommendations to separate Board Chair and CEO leadership and limit a director's number of outside directorships. Negative effects of director tenure on bankruptcy contradict the notion of “term limits,” suggesting that benefits of firm‐specific knowledge and experience may outweigh risks of entrenchment.

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“…Accordingly, taxes are important determinants of firms' target leverage. (Löffler and Maurer 2011) findings indicate that firms' target leverage ratios are significant predictors of their default probabilities. Due to uncertainties associated with tax policies, it may be difficult for a firm to use the optimal amount of debt, and thus the firm may utilize too much debt to increase its value.…”

mentioning

confidence: 88%

“…Thus, taxes play a significant role in firms' target leverage. Firms' target leverage ratios are also an important determinant of their default probabilities and many firms actively adjust their capital structure towards leverage targets (Löffler and Maurer 2011). Since tax policy is one of the largest sources of policy uncertainty (Baker et al 2016), uncertainties associated with tax policies may make it difficult for a firm to determine optimal debt level.…”

Section: Introductionmentioning

confidence: 99%

How Does Aggregate Tax Policy Uncertainty Affect Default Risk?

Tosun

Yildiz

2020

JRFM

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We examine the impact of aggregate tax policy uncertainty on firm-level default risk. Due to uncertainties associated with tax policies, firms could have difficulties in determining their optimal debt level and use too much debt to increase their values. This can increase firms’ financial risk and default probabilities. At the same time, tax policy uncertainty may lead some firms to take less risk which could lower their use of debt and in turn lower the probability of default. We find that tax policy uncertainty is positively associated with firms’ expected default probabilities. In terms of economic significance, our findings show an increase of 14.83% in expected default probability, on a relative basis. Our results are robust to controlling for conditions of the economy, conditions of the stock market, financial constraints of firms, and credit quality of firms. Our evidence adds to two strands of research: research on taxation and firms’ risk profiles and the impact of policy uncertainty on firms’ decisions.

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Incorporating the dynamics of leverage into default prediction

Cited by 17 publications

References 32 publications

Understanding the Economic Determinants of the Severity of Operational Losses: A Regularized Generalized Pareto Regression Approach

Understanding the Economic Determinants of the Severity of Operational Losses: A Regularized Generalized Pareto Regression Approach

Board Capital and the Downward Spiral: Antecedents of Bankruptcy in a Sample of Unlisted Firms

How Does Aggregate Tax Policy Uncertainty Affect Default Risk?

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