Sammendrag
In this paper, a new framework for failure prediction is presented. I ts most important feature is that corporate failure is conditioned on the valu a series of exogenous risk factors. The framework is relate d to other applications of the multi-factor model (e.g. to the analys is of stock returns) and it draws on Donaldson's earlier work. A mode l is developed in which future cash balances are related to future va lues of risk factors. The reaction of a firm to a change in the value of a risk factor (its sensitivity to that factor) generally differs from the reaction of other firms. Thus, each firm has its own specifi c risk profile. The framework may be applied in several fields. For t he management of individual firms it shows how cash balances are rela ted to changes in risk factors and how this relation can be manipulat ed. For banks it supports the monitoring of clients. Given a particul ar change in the risk factor value, it can be seen which clients will be a risk for the bank. Similarly, it may help the government in det ecting firms/industries that will be harmed more under various scenar ios of risk factor changes
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