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Article
Publication date: 16 June 2016

Khushbu Agrawal and Yogesh Maheshwari

– 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.

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.

Details

South Asian Journal of Global Business Research, vol. 5 no. 2
Type: Research Article
ISSN: 2045-4457

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Article
Publication date: 1 August 2003

Nirosh Kuruppu, Fawzi Laswad and Peter Oyelere

Recent research questions whether bankruptcy is the best proxy for assessing going concern since filing for bankruptcy is not synonymous with the invalidity of the going…

Abstract

Recent research questions whether bankruptcy is the best proxy for assessing going concern since filing for bankruptcy is not synonymous with the invalidity of the going concern assumption. Furthermore, in contrast to debtor‐oriented countries such as the USA, liquidation is the most likely outcome of corporate insolvency in creditor‐oriented countries such as the UK, Germany, Australia and New Zealand. This suggests that bankruptcy prediction models have limited use for assessing going concern in creditor‐oriented countries. This study examines the efficacy of a corporate liquidation model and a benchmark bankruptcy prediction model for assessing company liquidation. It finds that the former is more accurate in predicting company liquidations in comparison with the latter. Most importantly, Type 1 errors for the liquidation prediction model are significantly lower than for the bankruptcy prediction model, which indicates its greater efficacy as an analytical tool for assessing going concern. The results also suggest that bankruptcy prediction models might not be appropriate for assessing going concern in countries where the insolvency code is creditor‐oriented.

Details

Managerial Auditing Journal, vol. 18 no. 6/7
Type: Research Article
ISSN: 0268-6902

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Article
Publication date: 12 December 2018

Ghulam Ayehsa Siddiqua, Ajid ur Rehman and Shahzad Hussain

The purpose of this paper is to investigate the asymmetric adjustment of cash holdings in Pakistani firms for above and below target firms.

Abstract

Purpose

The purpose of this paper is to investigate the asymmetric adjustment of cash holdings in Pakistani firms for above and below target firms.

Design/methodology/approach

The study employs generalized method of moments (GMM) to investigate the adjustment of cash holdings.

Findings

The study found that the firms which hold cash above the optimal level of cash holdings have higher speed of adjustment than the firms which hold cash below the optimal level. Financially constrained (FC) firms also adjust their cash holdings faster than financially unconstrained (FUC) firms but high speed of downward adjustment does not remain persistent after financial constraints are controlled. Findings of this study reveal this asymmetric adjustment in above and below target firms and extend these results in FC and FUC Pakistani listed firms, respectively.

Research limitations/implications

The conclusion of this study has been derived under certain limitations. There is a vast space to extend this study in different dimensions. Firms operating in capital-intensive industries may provide different results for financial constraints because their policy designing would be quite different from other firms.

Originality/value

This study contributes to cash holdings research in Pakistan by exploring the adjustment behavior of cash holdings across Pakistani non-financial firms using econometric modeling. Downward adjustment rate is supposed to be higher than upward adjustment rate and this rate is tested using dynamic panel data model. Similarly, it is inferred that this relationship holds for above target firms even after including the financial constraints in the presented model.

Details

Journal of Asian Business and Economic Studies, vol. 26 no. 1
Type: Research Article
ISSN: 2515-964X

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Article
Publication date: 17 March 2020

Zhe Zhang, Zhi Ye Koh and Florence Ling

This study aims to develop benchmarks of the financial performance of contractors and a decision support tool for evaluation, selection and appointment of contractors. The…

Abstract

Purpose

This study aims to develop benchmarks of the financial performance of contractors and a decision support tool for evaluation, selection and appointment of contractors. The financial benchmarks allow contractors to know where they are relative to the best-performing contractors, and they can then take steps to improve their own performance. The decision support tool helps clients to decide which contractor should be awarded the project.

Design/methodology/approach

Financial data between 2013 and 2015 of 44 Singapore-based contractors were acquired from a Singaporean public agency. Benchmarks for Z-score and financial ratios were developed. A decision tree for evaluating contractors was constructed.

Findings

This study found that between 57% and 64% of contractors stayed in the financially healthy zone from 2013 to 2015. Ratios related to financial liabilities are relatively bad compared with international standards.

Research limitations/implications

The limitation is that the data is obtained from a cross-sectional survey of contractors’ financial performance in Singapore over a three-year period. Regarding the finding that ratios relating to financial liabilities are weak, the implication is that contractors need to reduce their financial liabilities to achieve a good solvency profile. Contractors may use the benchmarks to check their financial performances relative to that of their competitors. To reduce financial risks, project clients may use these benchmarks to examine contractors’ financial performance.

Originality/value

This study provides benchmarks for contractors and clients to examine the financial performance of contractors in Singapore. A decision tree is provided to aid clients in making decisions on which contractors to appoint.

Details

Journal of Financial Management of Property and Construction , vol. 25 no. 2
Type: Research Article
ISSN: 1366-4387

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Article
Publication date: 1 January 1994

Mark Weber

What is the relationship between outcomes for distressed firms and the value of managerial stockholdings in those firms? The outcomes presented are: (1) Chapter 11…

Abstract

What is the relationship between outcomes for distressed firms and the value of managerial stockholdings in those firms? The outcomes presented are: (1) Chapter 11 reorganization; (2) acquisition/merger; (3) internal turnaround Dollar value of ownership of the firm's common stock by the firm's top managers is used to distinguish between the outcomes for distressed firms which have declining performance. The likelihood of a firm ending up in a merger with or being acquired by another private firm increases with the amount of managerial wealth invested in the firm's stock. Firms whose managers are not owners are more likely to follow an internal turnaround strategy, such as cutting costs and/or selling assets. This strategy offers non‐owner managers a greater opportunity to maintain their managerial prerogatives than does a merger or an acquisition. This outcome is consistent with agency theory, which asserts that where possible, managers act in their own best interests to the detriment of the stockholders' interests. In the context of the firm, agency theory describes the situation wherein stockholders (principals) delegate responsibility for the firm's day to day affairs to managers (agents). One key issue in agency theory is risk sharing. Managers and stockholders may prefer different outcomes for the distressed firm due to their different risk preferences. Findings of the present study suggest that managerial wealth was not a predictor of Chapter 11 reorganization in bankruptcy, but the distressed firms' strategies were affected by the aggregate dollar value of a firm's stock owned by top managers.

Details

The International Journal of Organizational Analysis, vol. 2 no. 1
Type: Research Article
ISSN: 1055-3185

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Book part
Publication date: 13 August 2018

Hsin-yi (Shirley) Hsieh, Jian Cao and Mark Kohlbeck

Purpose – We investigate the impact of CEO turnover on performance and accounting-based outcomes following major business restructurings.Design/Methodology/Approach – We

Abstract

Purpose – We investigate the impact of CEO turnover on performance and accounting-based outcomes following major business restructurings.

Design/Methodology/Approach – We analyze a sample of 217 major operational restructurings during the period 1999–2007 using regressions and other statistical tests.

Findings – We document significant improvements in postrestructuring operating and investment efficiencies with little differentiation between restructurings that involve a change in CEO and those that involve continuing CEOs. However, we find evidence of lower accounting quality for the continuing CEO firms. First, restructuring charges of CEO turnover firms are associated with lower current period unexpected core earnings and higher future period unexpected core earnings (lower levels of classification shifting). Second, CEO turnover firms have a significantly lower percentage of (i) restructuring charge reversals and (ii) prereversal shortfalls (in meeting analyst forecast estimates) followed by reversals (suggesting lower levels of subsequent earnings management). Therefore, turnover CEOs are less likely to manipulate restructuring charges to mask true economic performance than continuing CEOs. Overall, our evidence suggests continuing CEOs undertake less substantial restructurings, while opportunistically reporting similar charges and performance improvements, consistent with attempts to pool with new CEO hires to keep their jobs.

Originality/Value – Overall, our results highlight the key economic role played by top corporate managers in major business restructurings, suggesting that CEO turnover leads to both real changes in managerial actions and altered reporting incentives.

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Article
Publication date: 2 March 2020

Daniel Ames, Joshua Coyne and Kevin Kim

The purpose of the authors’ research study is to identify the impact of life cycle stage on firm acquisitions.

Abstract

Purpose

The purpose of the authors’ research study is to identify the impact of life cycle stage on firm acquisitions.

Design/methodology/approach

The authors use a series of empirical databases to identify characteristics of acquirers and their targets. The authors then use logistic regressions and joint tests to identify significant differences between declining and non-declining acquirers.

Findings

The authors find that declining acquirers are more likely to pursue diversifying acquisitions and to pay for the acquisition with stock considerations. Acquisitions by declining acquirers result in positive abnormal returns initially, but post-acquisition returns are negative.

Research limitations/implications

The authors’ primary limitation is their data, which only includes public acquirers and targets, and runs from January 1, 1988 to December 31, 2010.

Practical implications

The authors’ research suggests that regulators, stakeholders and prospective stakeholders should consider the life cycle stage of an acquiring firm in setting expectations about motivations for and likely performance subsequent to the acquisition.

Originality/value

The authors’ paper is the first to consider the effect of firm life cycle stage on the motivation and subsequent success of an acquisition. Given the tremendous impact to shareholders of such significant transactions, understanding the acquisition process more completely is important to capital markets participants.

Details

International Journal of Accounting & Information Management, vol. 28 no. 2
Type: Research Article
ISSN: 1834-7649

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Article
Publication date: 8 September 2020

Tom Aabo, Nicholai Theodor Hvistendahl and Jacob Kring

The purpose of this study is to investigate the association between corporate risk and the interaction between CEO incentive compensation and CEO overconfidence.

Abstract

Purpose

The purpose of this study is to investigate the association between corporate risk and the interaction between CEO incentive compensation and CEO overconfidence.

Design/methodology/approach

This empirical study performs random and fixed effect (FE) regression analysis. It uses option-implied measures of CEO overconfidence.

Findings

The authors contribute to the existing literature by showing (1) that the positive association between high CEO incentive compensation and corporate risk only exists in the sphere of overconfident CEOs and (2) that the positive association between overconfident CEOs and corporate risk only exists in the sphere of high CEO incentive compensation. The authors show that the combination of high CEO incentive compensation and CEO overconfidence is associated with an increase in corporate risk of approximately 6% while the individual effects are for all practical reasons negligible. The results imply that only the combination of high CEO incentive compensation and CEO overconfidence is associated with a significantly elevated level of corporate risk.

Research limitations/implications

The findings are based on S&P 1500 non-financial firms in the period 2007–2016.

Practical implications

The findings have important implications in terms of CEO selection and compensation.

Originality/value

This study provides empirical evidence on the importance of the dual presence of high CEO incentive compensation and CEO overconfidence for corporate risk. The previous literature has primarily investigated these phenomena in isolation.

Details

Managerial Finance, vol. 47 no. 2
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 3 April 2020

Ameen Qasem, Norhani Aripin and Wan Nordin Wan-Hussin

The purpose of this paper is to examine the influence of financial restatements on the sell-side analysts' stock recommendations.

Abstract

Purpose

The purpose of this paper is to examine the influence of financial restatements on the sell-side analysts' stock recommendations.

Design/methodology/approach

The sample of this study is based on a dataset from a panel of 246 Malaysian public listed companies for the period 2008 to 2013 (651 company-year observations). This study employs feasible generalized least squares regression.

Findings

This study finds a negative and significant relationship between restated companies and sell-side analysts' stock recommendations, which means that sell-side analysts issue less favorable stock recommendations for restated companies.

Practical implications

The findings based on observations from an emerging economy complement the results of the US studies that analysts revise their earnings forecasts or recommendations downwards or drop coverage following financial restatements. The results of this study should be useful to capital market participants in understanding how analysts perceive and evaluate restated companies.

Originality/value

This paper expands the literature on financial restatements consequences in an emerging market which is largely unstudied. Prior research on analyst behavior towards restatements has focused on the consequences of restatements in terms of analyst following and forecast accuracy and dispersion. This study examines if and how the restatements affect the analysts' final output as reflected in the recommendation opinion, an area that has so far received little attention.

Details

International Journal of Managerial Finance, vol. 16 no. 4
Type: Research Article
ISSN: 1743-9132

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Article
Publication date: 11 September 2007

Joseph Calandro

The purpose of this article is to provide commentary on the utility of Altman's Z‐score as a strategic assessment and performance management tool. This possibility is

Abstract

Purpose

The purpose of this article is to provide commentary on the utility of Altman's Z‐score as a strategic assessment and performance management tool. This possibility is suggested in the recently published book Measuring Organizational Performance – Metrics for Entrepreneurship and Strategic Management Research (Northampton, MA: Edward Elgar, 2006) by Robert B. Carton and Charles W. Hofer.

Design/methodology/approach

This paper is a corporate manager's analysis of the utility of Altman's Z‐score as a strategic assessment and performance management tool based on published research, with suggestions for further research.

Findings

The analysis supports Carton and Hofer's findings with respect to the utility of the Z‐score as a strategic assessment and performance management tool.

Practical implications

While the Z‐score is both popular and widely used in the fields of credit risk analysis, distressed investing, M&A target analysis, and turnaround management it has received relatively little attention as a strategic assessment and performance management tool. The findings of Carton and Hofer's study, in conjunction with the impressive results achieved by GTI Corporation, suggest that applying the Z‐score in strategy and performance management may also be warranted, especially after more research is undertaken.

Originality/value

This article offers a manager's perspective on new research that indicates the potential of a popular financial distress metric to provide insight in the areas of entrepreneurship and strategic management.

Details

Strategy & Leadership, vol. 35 no. 5
Type: Research Article
ISSN: 1087-8572

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