Assessing Default Risks for Chinese Firms : A Lost Cause?

Author/Editor:

Daniel Law ; Shaun K. Roache

Publication Date:

June 26, 2015

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

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. 15/140

Subject:

English

Publication Date:

June 26, 2015

ISBN/ISSN:

9781513597584/1018-5941

Stock No:

WPIEA2015140

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

32

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