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Evaluation of credit risk based on firm performance

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  • Psillaki, Maria
  • Tsolas, Ioannis E.
  • Margaritis, Dimitris

Abstract

This paper investigates whether productive inefficiency measured as the distance from the industry's 'best practice' frontier is an important ex-ante predictor of business failure. We use samples of French textiles, wood and paper products, computers and R&D companies to obtain efficiency estimates for individual firms in each industry. These efficiency measures are derived from a directional technology distance function constructed empirically using non-parametric data envelopment analysis (DEA) methods. Estimating binary and ordered logit regression models we find that productive efficiency has significant explanatory power in predicting the likelihood of default over and above the effect of standard financial indicators.

Suggested Citation

  • Psillaki, Maria & Tsolas, Ioannis E. & Margaritis, Dimitris, 2010. "Evaluation of credit risk based on firm performance," European Journal of Operational Research, Elsevier, vol. 201(3), pages 873-881, March.
    • Handle: RePEc:eee:ejores:v:201:y:2010:i:3:p:873-881
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    More about this item

    Keywords

    G21 Credit risk Data envelopment analysis (DEA) Directional distance functions Bankruptcy prediction;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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