Net Worth at Risk

Abstract

The Study Group of the European Committee of Central Balance Sheet Data Offices (ECCB) examines in the third study of the group the newly developed concept of Net Worth at Risk (NWaR). This concept analyses the function of equity as a protective cushion against losses in a recession period. The equity levels of French, German, Italian and Spanish corporations in manufacturing are compared to a potential loss - called Net Worth at Risk which might affect a corporation with a small but specified degree of probability in a two-year recession as a worst-case scenario. The difference between NWaR figures and the equity levels give an indication on the number of companies with inadequate equity in a recession period. The results of this study suggests that NWaR can be of interest in explaining, at least partially, the capital structure of companies and can be used as one of several tools for studying the risk profile of specific sectors. The results obtained from the cross-country analysis have to be interpreted with caution as they are influenced by differences in the institutional framework in the four countries such as tax systems, the degree of legal protection of creditors, the banking systems in each country or the accounting regimes. The study covers the period 1987-2002. An examination of size effects as well as an analysis of selected sub-sectors of the manufacturing sector complete the study.

About the ECCB and its Study Group

The European Committee of Central Balance Sheet Data Offices (ECCB) brings together central banks, statistical offices and similar institutions within the European Union which maintain significant databases of financial statements of non-financial companies. The objective of the ECCB is to interchange viewpoints in order to improve the analytical methods of company accounting data in various fields, in particular for statistical and credit rating purposes. In co-operation with the European Commission the ECCB provides the BACH Database, which is publicly available and contains harmonised financial statements statistics of corporations. In addition the ECCB administers the European Sectoral Reference database.

The research of the Study Group of the ECCB has been dedicated since its creation in 1993 on the subject of equity and financial structures of European corporations. The databases include small, medium-sized and large companies far beyond listed corporations.

Keywords: Equity ratio, Corporate finance, Value at Risk, Equity cushion against losses, Recession

JEL Classification: G32, G33, G21, M41, L60