Predicting financial distress: revisiting the option-based model
South Asian Journal of Global Business Research
ISSN: 2045-4457
Article publication date: 16 June 2016
Abstract
Purpose
The purpose of this paper is to assess the significance of the Merton distance-to-default (DD) in predicting defaults for a sample of listed Indian firms.
Design/methodology/approach
The study uses a matched pair sample of defaulting and non-defaulting listed Indian firms. It employs two alternative statistical techniques, namely, logistic regression and multiple discriminant analysis.
Findings
The option-based DD is found to be statistically significant in predicting defaults and has a significantly negative relationship with the probability of default. The DD retains its significance even after the addition of Altman’s Z-score. This further establishes its robustness as a significant predictor of default.
Originality/value
The study re-establishes the utility of the Merton model in India using a simplified version of the Merton model that can be easily operationalized by practitioners, reasonably larger sample size and is done in a more recent period covering the post global financial crisis period. The findings could be valuable to banks, financial institutions, investors and managers.
Keywords
Citation
Agrawal, K. and Maheshwari, Y. (2016), "Predicting financial distress: revisiting the option-based model", South Asian Journal of Global Business Research, Vol. 5 No. 2, pp. 268-284. https://doi.org/10.1108/SAJGBR-04-2015-0030
Publisher
:Emerald Group Publishing Limited
Copyright © 2016, Emerald Group Publishing Limited