Assessing Default Risks for Chinese Firms: A Lost Cause?
Electronic Access:
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Summary:
Assessing default risks for Chinese firms is hard. Standard measures of risk using market indicators may be unreliable because of implicit guarantees, the large role played by less-informed investors, and other market imperfections. We test this assertion by estimating stand-alone 1-year default probabilities for non-financial firms in China using an equity-based structural model and debt costs. We find evidence that the equity measure of default risk is sensitive to a firm’s balance sheet health, profitability, and ownership; specifically, default probabilities are higher for weaker, less profitable, and state-owned firms. In contrast, measures based on the cost of debt seem largely detached from fundamentals and instead determined by implicit guarantees. We conclude that for individual firms, equity-based measures, while far from perfect, provide a better measure of stand-alone default risks than borrowing costs.
Series:
Working Paper No. 2015/140
Subject:
Asset and liability management Asset valuation Credit ratings Credit risk Debt default External debt Financial institutions Financial regulation and supervision Money Stocks
English
Publication Date:
June 26, 2015
ISBN/ISSN:
9781513597584/1018-5941
Stock No:
WPIEA2015140
Pages:
32
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