The impact of financial distress risk on equity returns: A case study of non-financial firms of Pakistan Stock Exchange

Abstract. This study aims to investigate the relationship of financial distress risk and the equity returns of financially distressed firms listed on Pakistan Stock Exchange (PSX). Several studies have suggested that firm distress risk factor could be behind the book-to-market and size effects. Fama and French three factor Model (1993) is used for examining the relationship among equity returns, financial distress risk, size and book-to-market equity ratio. Non-financial firms listed on PSX are taken from the time-period of 2010-2016. Ohlson’s O-Score (1980) “bankruptcy prediction model” is used for the prediction of financial distress risk and forecasted the distress risk firms listed on PSX. The panel (unbalanced) data is used to get the empirical findings and showed that the financial distress risk and book-to-market equity effect are statistically insignificant to explain the stock returns of distress firms due to the inefficiency of market. However, size effect is significant in explaining the stock returns of distress firms. The study also reveals that it is important to predict financial distress risk with a better predictor in order to avoid the uncertainties in PSX.Keywords. Financial distress risk, Equity returns, Book-to-market effect, Size, Pakistan Stock Exchange.JEL. G30, G32

Does audit report information improve financial distress prediction over Altman's traditional Z‐Score model?

We analyze empirically the usefulness of combining accounting and auditing data in order to predict corporate financial distress. Concretely, we examine whether audit report information incrementally predicts distress over a traditional accounting model: the Altman's Z‐Score model. Although the audit report seems to play a critical part in financial distress prediction because auditors should warn investors about any default risks, this is the first study that uses audit report disclosures for predicting purposes. From a dataset of 1,821 Spanish distressed private firms, we analyze a sample of distressed and non‐distressed firms and develop logit prediction models. Our results show that while the only accounting model registers a classification accuracy of 77%, combined models of accounting and auditing data exhibit considerably higher accuracy (about 87%). Specifically, our findings indicate that the number of disclosures included in the audit report, as well as disclosures related to a firm's going concern status, firms’ assets, and firms’ recognition of revenues and expenses contribute the most to the prediction. Our empirical evidence has implications for financial distress practice. For managers, our study highlights the importance of audit report disclosures for anticipating a financial distress situation. For regulators and auditors, our study underscores the importance of recent changes in regulation worldwide intended to increase auditor's transparency through a more informative audit report.fi=vertaisarvioitu|en=peerReviewed

Can bank interaction during rating measurement of micro and very small enterprises ipso facto Determine the collapse of PD status?

This paper begins with an analysis of trends - over the period 2012-2018 - for total bank loans, non-performing loans, and the number of active, working enterprises. A review survey was done on national data from Italy with a comparison developed on a local subset from the Sardinia Region. Empirical evidence appears to support the hypothesis of the paper: can the rating class assigned by banks - using current IRB and A-IRB systems - to micro and very small enterprises, whose ability to replace financial resources using endogenous means is structurally impaired, ipso facto orient the results of performance in the same terms of PD assigned by the algorithm, thereby upending the principle of cause and effect? The thesis is developed through mathematical modeling that demonstrates the interaction of the measurement tool (the rating algorithm applied by banks) on the collapse of the loan status (default, performing, or some intermediate point) of the assessed micro-entity. Emphasis is given, in conclusion, to the phenomenon using evidence of the intrinsically mutualistic link of the two populations of banks and (micro) enterprises provided by a system of differential equation

An integrated cyber security risk management framework and risk predication for the critical infrastructure protection

Cyber security risk management plays an important role for today’s businesses due to the rapidly changing threat landscape and the existence of evolving sophisticated cyber attacks. It is necessary for organisations, of any size, but in particular those that are associated with a critical infrastructure, to understand the risks, so that suitable controls can be taken for the overall business continuity and critical service delivery. There are a number of works that aim to develop systematic processes for risk assessment and management. However, the existing works have limited input from threat intelligence properties and evolving attack trends, resulting in limited contextual information related to cyber security risks. This creates a challenge, especially in the context of critical infrastructures, since attacks have evolved from technical to socio-technical and protecting against them requires such contextual information. This research proposes a novel integrated cyber security risk management (i-CSRM) framework that responds to that challenge by supporting systematic identification of critical assets through the use of a decision support mechanism built on fuzzy set theory, by predicting risk types through machine learning techniques, and by assessing the effectiveness of existing controls. The framework is composed of a language, a process, and it is supported by an automated tool. The paper also reports on the evaluation of our work to a real case study of a critical infrastructure. The results reveal that using the fuzzy set theory in assessing assets' criticality, our work supports stakeholders towards an effective risk management by assessing each asset's criticality. Furthermore, the results have demonstrated the machine learning classifiers’ exemplary performance to predict different risk types including denial of service, cyber espionage and crimeware

El impacto de la auditoría en el pronóstico del riesgo de insolvencia

Tesis de la Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, leída el 21/06/2017The aim of this PhD dissertation is to examine the external audit information of firms in the year prior to insolvency legal proceedings. We answer several research questions related to the association of auditing and financial distress situations. This topic is of interest in recent years because there has been an increasing number of bankruptcy failures due to the global financial crisis and some accounting scandals in which auditors failed to warn about imminent bankruptcies. First, we start by analyzing the utility of the accounting data during legal proceedings in Chapter 1, which entitles ‘The usefulness of financial information in the bankruptcy process’, and results show that financial information is fundamental to recognize early stages of a bankruptcy situation, so accounting data may help during the pre-bankruptcy phase or to shorten the costly legal process. Second, in Chapter 2 ‘The audit report: classification and analysis of emphasis of matter and qualification paragraphs’ we focus on the content of audit reports in the year immediately preceding bankruptcy and develop a codification of audit report disclosures, as there is not a commonly used classification of the content of audit reports in the literature. Our evidence indicates that auditors signal viability issues in the report in the form of emphasis of matter sections and qualification paragraphs. Moreover, qualifications are more frequently disclosed than matter sections and, regarding content, going concern uncertainties, initial phases of the legal process, accumulated losses and short-term financial investments’ valuation are the most recurrent comments. Third, using the codification created, in Chapter 3 ‘The content of the audit report in the year prior to bankruptcy filing. Empirical evidence from Spain’ we examine different features from the auditor and the audited firm that may affect the content of the report. Interestingly, we find that the propensity to issue disclosures is significantly different depending on auditor size, firm’s industry and financial condition, quarter on which the court order is imposed and type of resolution of the legal process...Esta tesis doctoral tiene como principal objetivo el estudio de la información de auditoría externa que publican las entidades en el año inmediatamente anterior al comienzo del proceso legal concursal o concurso de acreedores. A lo largo de esta tesis, respondemos una serie de preguntas de investigación en relación a la asociación de la auditoría externa y las situaciones de riesgo de insolvencia empresarial. Este tema suscita gran interés en la actualidad ya que en los últimos años se han disparado el número de solicitudes concursales con motivo de la reciente crisis económica mundial y, además, han existido varios escándalos financieros en los que los auditores no dieron señal alguna en su informe previo de una posible situación de insolvencia. En primer lugar, comenzamos con el análisis de la utilidad de la información financiera en el proceso legal del concurso de acreedores en el capítulo 1, titulado ‘La utilidad de la información financiera en el procedimiento concursal’. Nuestros resultados muestran que la información financiera es fundamental para reconocer las primeras señales de una posible situación de quiebra empresarial, por lo que los datos contables pueden ayudar al usuario durante la fase preconcursal o en el propio concurso, para intentar acortar el proceso y, con ello, minimizar sus elevados costes. En segundo lugar, en el capítulo 2 ‘La utilidad de la información financiera en el procedimiento concursal’ nos centramos en el contenido del informe de auditoría del año que precede la entrada en el concurso de acreedores y desarrollamos una codificación del contenido del informe de auditoría, ya que no hemos entrado en la literatura previa una clasificación comúnmente aceptada y utilizada. Nuestra evidencia indica que los auditores señalan problemas en cuanto a la viabilidad de la empresa en el informe tanto en forma de párrafo de énfasis como de salvedades, siendo más frecuentes las salvedades que los anteriores. Asimismo, en cuanto al contenido de estos párrafos, los que mencionan dudas a la gestión continuada, fases iniciales del proceso legal concursal, pérdidas acumuladas en la compañía y temas relacionados con la valoración de inversiones financieras temporales son los más frecuentes. En tercer lugar, a partir de la codificación desarrollada, en el capítulo 3 ‘El contenido del informe de auditoría en el año previo a la declaración del concurso de acreedores. Contraste empírico para el caso español’ examinamos diferentes características del auditor y de la empresa auditada que pueden afectar al contenido del informe de auditoría. Del análisis encontramos unos resultados interesantes que revelan que la propensión a emitir comentarios en el informe es significativamente diferente dependiendo del tamaño del auditor, del sector y la situación financiera de la auditada, del trimestre en que se declara el auto de concurso, así como del tipo de resolución legal del mismo...Fac. de Ciencias Económicas y EmpresarialesTRUEunpu

Predicting insolvencies: The contribution of the external financial audit

Em Portugal, desde a crise financeira, o número de Pequenas e Médias Empresas (PME) que entram em insolvência é bastante elevado e preocupante pelos impactos que causam na economia e na sociedade. Embora já tenham sido desenvolvidos diversos modelos preditivos das insolvências cujos preditores são, essencialmente, a informação financeira, este tema ainda é crítico nos dias de hoje, pelo que é de enorme relevância continuar a investigar e a criar modelos com maior precisão que os anteriores. Deste modo, e como as demonstrações financeiras das empresas nem sempre transparecem a realidade económico-financeira das mesmas, o presente estudo avalia o impacto das características do auditor e o conteúdo da sua opinião na predição das insolvências. Para tal, recorre-se a técnicas de análise de dados mais avançadas, nomeadamente text mining e árvores de decisão com o algoritmo CART de forma a analisar as Certificações Legais de Contas (CLC)/Relatórios de Auditoria Financeira Externa (RAFE), entre os anos de 2016 e 2020, de uma amostra de 2.040 empresas, 1.020 não insolventes e 1.020 insolventes. Os resultados obtidos permitem identificar uma relação entre as características do auditor e o conteúdo da sua opinião e a insolvência das empresas, prevendo-se uma Percentagem de Exemplos Corretamente Classificados (PECC) de 93%. O principal contributo empírico desta investigação é gerar melhor conhecimento sobre a inviabilidade das empresas através da atividade de Auditoria Financeira Externa (AFE), recorrendo-se a novas técnicas nunca antes utilizadas em modelos preditivos.info:eu-repo/semantics/acceptedVersio