Mind the Tail, or Risk to Fail

52 Pages Posted: 4 Oct 2016 Last revised: 19 Feb 2019

See all articles by Jairaj Gupta

Jairaj Gupta

University of Birmingham

Sajid M. Chaudhry

Aston University - Aston Business School; Aston University - Aston Business School

Date Written: January 2019

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.

Keywords: downside risk, value at risk, tail risk, bankruptcy, financial distress

JEL Classification: G33, C53

Suggested Citation

Gupta, Jairaj and Chaudhry, Sajid M. and Chaudhry, Sajid M., Mind the Tail, or Risk to Fail (January 2019). Journal of Business Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2847422 or http://dx.doi.org/10.2139/ssrn.2847422

Jairaj Gupta (Contact Author)

University of Birmingham ( email )

Edgbaston, Birmingham B15 2TT
United Kingdom
00-44-7795904913 (Phone)

Sajid M. Chaudhry

Aston University - Aston Business School ( email )

Aston Triangle
Birmingham, B47ET
United Kingdom

Aston University - Aston Business School ( email )

Aston Triangle
Birmingham, B47ET
United Kingdom

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