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The Relevance of Accounting Data in the Measurement of Credit Risk

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  • Amer Demirovic
  • Dylan Thomas

Abstract

Option pricing theory provides a robust and theoretically sound framework for the measurement of credit risk. Assuming perfect market conditions, information relevant to the measurement of a firm's credit risk is reflected in its equity price, with no role for accounting data. This hypothesis is tested using UK data and credit ratings as a proxy for credit risk. It is found that Merton's distance-to-default measure is the most significant variable in the measurement of credit risk. However, it is also found that accounting variables are incrementally informative when added to a model that contains only the distance-to-default measure. The incremental informativeness of accounting data varies across industries and depends on firm size. Although it is found that the general level of credit risk depends on the state of the economy, there is no evidence to suggest that the incremental informativeness of the accounting variables depends upon macroeconomic conditions.

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  • Amer Demirovic & Dylan Thomas, 2007. "The Relevance of Accounting Data in the Measurement of Credit Risk," The European Journal of Finance, Taylor & Francis Journals, vol. 13(3), pages 253-268.
    • Handle: RePEc:taf:eurjfi:v:13:y:2007:i:3:p:253-268
    DOI: 10.1080/13518470601025177
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    Cited by:

    1. Antonio Trujillo-Ponce & Reyes Samaniego-Medina & Clara Cardone-Riportella, 2014. "Examining what best explains corporate credit risk: accounting-based versus market-based models," Journal of Business Economics and Management, Taylor & Francis Journals, vol. 15(2), pages 253-276, April.
    2. Nasiri, Maryam Akbari & Narayan, Paresh Kumar & Mishra, Sagarika, 2019. "Reaction of the credit default swap market to the release of periodic financial reports," International Review of Financial Analysis, Elsevier, vol. 65(C).
    3. George Chalamandaris & Nikos E. Vlachogiannakis, 2018. "Are financial ratios relevant for trading credit risk? Evidence from the CDS market," Annals of Operations Research, Springer, vol. 266(1), pages 395-440, July.
    4. Buchanan, Bonnie & Kaya, Caglar, 2024. "Foundation ownership and creditor governance: Evidence from publicly listed companies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 93(C).
    5. Demirovic, Amer & Tucker, Jon & Guermat, Cherif, 2015. "Accounting data and the credit spread: An empirical investigation," Research in International Business and Finance, Elsevier, vol. 34(C), pages 233-250.
    6. Bernoth, Kerstin & Pick, Andreas, 2011. "Forecasting the fragility of the banking and insurance sectors," Journal of Banking & Finance, Elsevier, vol. 35(4), pages 807-818, April.
    7. Purificación Parrado-Martínez & Antonio Partal-Ureña & Pilar Gómez Fernández-Aguado, 2016. "Banking Soundness Indicators and Sovereign Risk in Time of Crisis: The Case of the European Union," The World Economy, Wiley Blackwell, vol. 39(8), pages 1172-1193, August.
    8. Mehmood, Mian Saqib & Sheraz, Iram & Mehmood, Asif & G. Mujtaba, Bahaudin, 2017. "Empirical Examination for Operational and Credit Risk Perspective – A Case of Commercial Banks of Pakistan," MPRA Paper 80491, University Library of Munich, Germany.
    9. Alessandro Mechelli & Vincenzo Sforza & Alessandra Stefanoni & Riccardo Cimini, 2018. "The Usefulness of Regulatory Capital for Investors’ Judgments in the Basel 3 Framework," International Journal of Business and Management, Canadian Center of Science and Education, vol. 13(6), pages 1-72, April.
    10. Abdullah Ash-shu¡¯ayree Al-khawaldeh, 2013. "Determinants and Impacts of Internal Credit Rating," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 4(1), pages 120-131, January.
    11. Zuray Melgarejo & Katrin Simon & Francisco J. Arcelus, 2010. "Differences In Financial Performance Amongst Spanish Smes According To Their Capital‐Ownership Structure: A Descriptive Analysis," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 81(1), pages 105-129, March.
    12. repec:ptu:bdpart:r201709 is not listed on IDEAS
    13. repec:pab:wpbsad:12.07 is not listed on IDEAS
    14. Purificacion Parrado-Martinez & Antonio Parta Ureña & Pilar Gomez Fernandez-Aguado, 2014. "Usefulness of Financial Soundness Indicators for risk assessment: The case of EU member countries," Working Papers 14.01, Universidad Pablo de Olavide, Department of Financial Economics and Accounting (former Department of Business Administration).
    15. Paulo Soares de Pinho & Luciana Barbosa, 2017. "Operational cycle and tax liabilities as determinants of corporate credit risk," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.

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