Examining What Best Explains Corporate Credit Risk: Accounting-Based versus Market-Based Models

Journal of Business Economics and Management, 2014, 15(2): 253–276

Posted: 2 Jun 2012 Last revised: 29 Apr 2014

See all articles by Antonio Trujillo‐Ponce

Antonio Trujillo‐Ponce

Universidad Pablo de Olavide - Department of Financial Economics & Accounting

Reyes Samaniego-Medina

Universidad Pablo de Olavide

Clara Cardone-Riportella

Department of Financial Economics & Accounting, Pablo de Olavide University (Seville, Spain)

Date Written: August 6, 2012

Abstract

This paper uses a sample of 2,186 credit default swap (CDS) spreads quoted in the European market during the period 2002–2009 to empirically analyze which model – accounting- or market-based – better explains corporate credit risk. We find little difference in the explanatory power of these two approaches. Our results indicate that a comprehensive model that combines accounting- and market-based variables is the best option to explain the credit risk, suggesting that both types of data are complementary. We also demonstrate that the explanatory power of credit risk models is particularly strong during periods of high uncertainty, such as those experienced in the recent financial crisis. Finally, the comprehensive model continues to produce the best results if the credit rating is used as the proxy for credit risk; however, accounting variables currently appear to have a more important role than market variables in determining corporate credit ratings.

Keywords: bankruptcy, credit default swaps, credit rating, credit risk, distance-to-default, European companies

JEL Classification: C52, G13, G33, M41

Suggested Citation

Trujillo-Ponce, Antonio and Samaniego-Medina, Reyes and Cardone-Riportella, Clara, Examining What Best Explains Corporate Credit Risk: Accounting-Based versus Market-Based Models (August 6, 2012). Journal of Business Economics and Management, 2014, 15(2): 253–276, Available at SSRN: https://ssrn.com/abstract=2072176 or http://dx.doi.org/10.2139/ssrn.2072176

Antonio Trujillo-Ponce (Contact Author)

Universidad Pablo de Olavide - Department of Financial Economics & Accounting ( email )

Ctra. Utrera, Km.1
Sevilla, 41013
Spain

HOME PAGE: http://https://www.upo.es/investiga/banef/

Reyes Samaniego-Medina

Universidad Pablo de Olavide ( email )

Ctra. Utrera, Km.1
Sevilla, Seville 41010
Spain

Clara Cardone-Riportella

Department of Financial Economics & Accounting, Pablo de Olavide University (Seville, Spain) ( email )

Ctra. de Utrera, km 1
Seville, Seville 41013
Spain
00 34 954 349056 (Phone)

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