Ph.D. Theses
Ph.D. Theses
The theses listed below are sorted by Ph.D. and, within each Ph.D., by year of defense.
Title: Essays on credit risk management for firms
| Programme: | Finance |
| Student: | Samuel da Rocha Lopes |
| Supervisor(s): | Mohamed Azzim Gulamhussen |
| Abstract: | This dissertation consists of three papers about credit risk management and covers different types of firms that can be seen in a bank portfolio. It is used a comprehensive sample maintained by the Portuguese central bank with approximately 43,000 observations on more than 16,000 firms for the period 1997-2003. Almost 2,500 of these observations relate to firms that entered into default according to Basel II definition, representing 6% of the total sample. For the empirical estimations, different methodologies and sub-samples were used to guarantee the fit of the data and the robustness of the results. The first paper (Chapter 1) studies the influence of the independent auditor's going concern evaluation by examining default following the release of the auditor's report. Professional auditing standards require the independent auditor to disclose the uncertainty in the auditor's opinion when there is substantial doubt about an entity's ability to continue as a going concern. The primary purpose of our study was to determine whether the independent auditor's going concern evaluation had information content by examining whether firms default following issuance of a GCO. We use a sub-sample on 12,199 audit reports relating to approximately 2,000 firms that are liable by law to have their accounts audited on an annual basis. Empirical estimation of a logit model controlling for accounting cash flow related and non-accounting variables shows that the likelihood of default for firms that received going concern opinion is 2.792 times that of firms that received a clean opinion. Likelihood ratio tests for omitted variable also confirm the incremental predictive ability of going concern opinion over and above accounting and non-accounting variables for the estimation and hold-out samples. In the non-defaulting group the average default rate is 6.05% and in the defaulting group it is 17.78%. The default rate for firms in the nondefaulting group that received a going concern opinion is 9.92% and for firms that received a clean opinion is 5.96%. In the defaulting group, the rate for firms that received a going concern opinion is 35.49% and for firms that received a clean opinion is 16.96%. Checks for robustness across different asset classes, age, industries and regions indicate that firms that receive a going concern opinion on average default more than those that receive a clean opinion. The second paper (Chapter 2) uses the total sample and analyzes default events for limited liability (non-listed) and full liability firms in order to understand the loan default characteristics of these two groups of firms. We test six hypotheses that relate the influence of accounting ratios and their distributional properties to default. Additionally, two hypotheses are tested relating the influence of liability status of firms and default and the incremental predictive ability of liability status over and above accounting ratios when predicting default. The following ratios - cash flow to total debt, operational cash flows to debt costs, equity to total assets and liquidity - are found to be negatively related to default. Size of the firm and age are also negatively related to default. Limited liability is positively related to default. The predicted default probability of full liability firms is 0.83 times that of limited liability firms. The likelihood ratio test for omitted variable also confirms the incremental predictive ability of liability status over and above accounting information for the estimation and hold-out samples. In the non-defaulting group, the average default rate for limited liability firms is 0.53% higher than that of full liability firms. This difference is 2.07% higher in the defaulting group. Cross tabulation by liability status and asset size shows that the advantage of full liability decreases with size. The third paper (Chapter 3) discloses a simple model based on accounting and nonaccounting ratios to determine default of privately-held firms and a method of computing default probabilities that can be used at the central bank in Portugal to calculate minimum capital requirements for the banking sector and utilize them as benchmarks in the validation of the internal models of the commercial banks. The Basel Committee on Banking Supervision advocates that central and commercial banks model and estimate default probabilities with specific country or bank portfolios. Little research exists on privately held firms and default. We use novel loan data for a sample of 31,025 accounts of privately-held firms maintained by the Portuguese central bank. Our data includes 30 accounting ratios and non-accounting information on size, age, industry and geographic regions. In relation to accounting ratios, we find interest costs to gross income, solidity and working capital to total assets to have the most significant influence on the probability of default. The accounting ratios that show lower marginal influence on the probability of default are return on investment, financial coverage, account payables and receivables, and return on equity. Additionally, we find that unlike the observation in the context of listed firms, size appears positively related to default and although age of firm appears negatively related to default, its marginal influence on default probability is very low. The analysis of the joint influence of non-accounting and accounting variables shows that size alters the relation between several variables and default. Our findings also indicate industry and geographic variations in the default data. The findings suggest that results relating to listed firms cannot be generalized by policy makers and regulators to apply equally to privatelyheld firms. The findings of the three papers all together provide valuable information not only to the credit risk management of financial institutions but also to policy makers and supervisory authorities. |
| Placement: | ECB European Central Bank/ Banco de Portugal (BdP), Economist |
| Defense Year: | 2009 |