Default Probabilities of Privately Held Firms

41 Pages Posted: 16 Mar 2012 Last revised: 8 Aug 2018

See all articles by Jin-Chuan Duan

Jin-Chuan Duan

National University of Singapore (NUS) - Business School and Risk Management Institute

Baeho Kim

Korea University Business School (KUBS)

Woojin Kim

Seoul National University - Business School

Donghwa Shin

University of North Carolina at Chapel Hill, Kenan-Flagler Business School

Date Written: July 7, 2018

Abstract

We estimate term structures of default probabilities for private firms using data consisting of 1,759 default events from 29,894 firms between 1999 and 2014. Each firm's default likelihood is characterized by a forward intensity model employing macro risk factors and firm-specific attributes. As private firms do not have traded stock prices, we devise a methodology to obtain a public-firm equivalent distance-to-default by projection which references the distance-to-defaults of public firms with comparable attributes. The fitted model provides accurate multi-period forecasts of defaults, leading to both economically and statistically significant benefits over benchmark models. The reported interest rates charged to private firms are reflective of the estimated default term structure.

Keywords: Default probability; Term structure; Privately held firm; Interest charge

JEL Classification: E43, E47, G33

Suggested Citation

Duan, Jin-Chuan and Kim, Baeho and Kim, Woojin and Shin, Donghwa, Default Probabilities of Privately Held Firms (July 7, 2018). Journal of Banking and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2023133 or http://dx.doi.org/10.2139/ssrn.2023133

Jin-Chuan Duan

National University of Singapore (NUS) - Business School and Risk Management Institute ( email )

1 Business Link
Singapore, 117592
Singapore

Baeho Kim (Contact Author)

Korea University Business School (KUBS) ( email )

Anam-dong, Sungbuk-Gu
Korea University Business School
Seoul, 136-701
82-2-3290-2626 (Phone)
82-2-922-7220 (Fax)

HOME PAGE: http://biz.korea.ac.kr/~baehokim

Woojin Kim

Seoul National University - Business School ( email )

1 Gwanak-ro, Gwanak-gu
Seoul, 08826
Korea, Republic of (South Korea)
82-2-880-5831 (Phone)

HOME PAGE: http://cba.snu.ac.kr/en/faculty?mode=view&memberidx=60582&major=6

Donghwa Shin

University of North Carolina at Chapel Hill, Kenan-Flagler Business School ( email )

300 Kenan Center Drive
Chapel Hill, NC 27599
United States
6096137699 (Phone)

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