In search of default risk predictors in emerging Asia

ABSTRACT

The study analyses the potential idiosyncratic factors and their pull and push effects on firm-level default risk using 540 listed and traded Asian firms during the period of 2010–2019. The lucrative returns and investment opportunities in Asian markets invites attention for potential research in this domain. Default risk is derived from the Merton model after adjusting for emerging market vulnerabilities. Using fixed-effect panel data regression modelling, we found that higher solvency and operating efficiency are the key pull factors that keep the firms away from default. In the long run, expansion potential and sustainability are key factors that pull the firms out of default. Conversely, a higher level of expansion potential, idiosyncratic volatility and size-effects push low-grade firms towards default despite having a higher level of operating efficiency. We conclude that low-grade firms must therefore keep a close eye on idiosyncratic factors in order to avoid default.

KEYWORDS:

• Credit risk
• emerging markets
• distance-to-default
• structural model

JEL CLASSIFICATION:

• G15
• F34

Acknowledgment

At the outset, the authors thank the reviewers for the heedful review of our manuscript. Their constructive feedback helped us to improve the quality of the manuscript. The authors also thank the special issue editor for giving us the opportunity to revise the manuscript. We would also like to extend our vote of thanks to reviewers and panelist who provided constructive feedback during the national and international conferences attended.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ For further reading on corporate debt market in emerging Asia, Omar and Prasanna (2021) can be referred.

² The stratified random sampling helps in branching off the entire population into multiple non-overlapping homogeneous groups (strata).

³ For India and China, we have used CRISIL ratings. For Indonesia, Malaysia, Taiwan and Thailand, the credit rating agencies are P.T. PEFINDO, RAM Holdings Berhad, Taiwan Ratings Corporation (TRC), Thai Rating and Information Services (TRIS), respectively. Please refer Table A.1 in appendix.