Mind the tail, or risk to fail

Abstract

In this study we hypothesise that more frequent extreme negative daily equity returns result in higher tail risk, and this subsequently increases firms’ likelihood of entering financial distress. Specifically, we investigate the role of Value-at-risk and Expected Shortfall in aggravating firms’ likelihood of experiencing financial distress. Our results show that longer horizon (three- and five-year) tail risk measures contributes positively toward firms’ likelihood of experiencing financial distress. Additionally, considering the declining number of bankruptcy filings, and increasing out-of-court negotiations and debt reorganisations, we argue in favour of penalising firms for becoming sufficiently close to bankruptcy that they have questionable going-concern status. Thus, we propose a definition of financial distress contingent upon firms’ earnings, financial expenses, market value and operating cash flow.

Publication DOI: https://doi.org/10.1016/j.jbusres.2019.02.037
Divisions: Aston Business School
Additional Information: © 2019, Elsevier. Licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International http://creativecommons.org/licenses/by-nc-nd/4.0/
Uncontrolled Keywords: Bankruptcy,Downside risk,Expected shortfall,Financial distress,Tail risk,Value-at-risk,Marketing
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Related URLs: https://www.sci ... 1274?via%3Dihub (Publisher URL)
http://www.scop ... tnerID=8YFLogxK (Scopus URL)
PURE Output Type: Article
Published Date: 2019-06-01
Published Online Date: 2019-02-27
Accepted Date: 2019-02-15
Authors: Gupta, Jairaj
Chaudhry, Sajid ( 0000-0001-8769-8920)

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Version: Accepted Version

Access Restriction: Restricted to Repository staff only until 27 August 2020.

License: Creative Commons Attribution Non-commercial No Derivatives


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