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Statistical modelling to predict corporate default for Brazilian companies in the context of Basel II using a new set of financial ratios

Minussi, J and Soopramanien, D G R and Worthington, D J (2007) Statistical modelling to predict corporate default for Brazilian companies in the context of Basel II using a new set of financial ratios. Working Paper. The Department of Management Science, Lancaster University.

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    Abstract

    This paper deals with statistical modelling to predict failure of Brazilian companies in the light of the Basel II definition of default using a new set of explanatory variables. A rearrangement in the official format of the Balance Sheet is put forward. From this rearrangement a framework of complementary non-conventional ratios is proposed. Initially, a model using 22 traditional ratios is constructed. Problems associated with multicollinearity were found in this model. Adding a group of 6 non-conventional ratios alongside traditional ratios improves the model substantially. The main findings in this study are: (a) logistic regression performs well in the context of Basel II, yielding a sound model applicable in the decision making process; (b) the complementary list of financial ratios plays a critical role in the model proposed; (c) the variables selected in the model show that when current assets and current liabilities are split into two sub-groups - financial and operational - they are more effective in explaining default than the traditional ratios associated with liquidity; and (d) those variables also indicate that high interest rates in Brazil adversely affect the performance of those companies which have a higher dependency on borrowing.

    Item Type: Monograph (Working Paper)
    Uncontrolled Keywords: Default prediction ; statistical modelling ; non-conventional financial ratios ; Basel II ; Brazilian context.
    Subjects:
    Departments: Lancaster University Management School > Management Science
    ID Code: 48875
    Deposited By: ep_importer_pure
    Deposited On: 11 Jul 2011 22:18
    Refereed?: No
    Published?: Published
    Last Modified: 27 Jul 2012 01:17
    Identification Number:
    URI: http://eprints.lancs.ac.uk/id/eprint/48875

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