Financial Distress and Tail Risk

Abstract

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. Subsequently, we investigate the role of tail risk measures (Value-at-risk and Expected Shortfall) in aggravating likelihood of financial distress. Our results show that longer horizon (three- and five-year) tail risk measures contributes positively toward firms’ likelihood of experiencing financial distress.

Publication DOI: https://doi.org/10.2139/ssrn.2847422
Divisions: College of Business and Social Sciences > Aston Business School
Additional Information: © 2018 The Authors
PURE Output Type: Working paper
Published Date: 2018-07-01
Authors: Gupta, Jairaj
Chaudhry, Sajid (ORCID Profile 0000-0001-8769-8920)

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