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: College of Business and Social Sciences > 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
Publication ISSN: 1873-7978
Last Modified: 03 Jun 2024 07:37
Date Deposited: 20 Feb 2019 09:35
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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 (ORCID Profile 0000-0001-8769-8920)

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