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:
/dk/atira/pure/subjectarea/aacsb/disciplinebasedresearch
Subjects:
ID Code:
48875
Deposited By:
Deposited On:
11 Jul 2011 21:18
Refereed?:
No
Published?:
Published
Last Modified:
01 Dec 2020 10:32