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Using Option Theory and Fundamentals to Assessing Default Risk of Listed Firms

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  • Papanastasopoulos, George

Abstract

In this paper, we use option based measures of financial performance that utilize market information in a binary probit regression to examine their informational context and properties as distress indicators and to estimate default probabilities for listed firms. Then, we enrich them with fundamentals that utilize accounting information. The results suggest that by adding accounting information from financial statements to market information from equity prices we can improve both in sample fitting and out of sample predictability of defaults. Therefore, option theory does not generate sufficient statistics of the actual default frequency. Our main conclusion is that while market information can be extremely valuable, it is most useful when coupled with accounting information in assessing default risk of listed firms.

Suggested Citation

  • Papanastasopoulos, George, 2005. "Using Option Theory and Fundamentals to Assessing Default Risk of Listed Firms," MPRA Paper 453, University Library of Munich, Germany, revised Jun 2006.
    • Handle: RePEc:pra:mprapa:453
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    References listed on IDEAS

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    1. Robert C. Merton, 2005. "Theory of rational option pricing," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 8, pages 229-288, World Scientific Publishing Co. Pte. Ltd..
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    More about this item

    Keywords

    option theory; fundamentals; default risk;
    All these keywords.

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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