Assessing the Credit Risk of Construction Contractors Using Cash Flow Based Credit Model
Date Issued
2011
Date
2011
Author(s)
Lei, Man-Cheng
Abstract
Though assessing the credit risk of construction contractors is a crucial issue in construction risk management, few researches focus on credit risk assessment for construction industry. Due to some limitations in the existing credit risk models (the structure-form models and the reduced-form models), they do not fully satisfy the demands for the credit risk assessment of construction industry. Since cash flows to large extent reflect a contractor’s capacity to meet its financial obligations, this study employ a flow based credit model proposed by Liao and Chen (2006) to assess the credit qualities of construction contractors. This study employs the Area Under Curve (AUC) to evaluate the model’s discriminatory performances in ranking the credit qualities of construction contractors in three years using Standard and Poor’s issuer credit ratings as the benchmarks.
The empirical results show that the cash flow based credit model are with an excellent discriminatory performance in one year (AUC=0.8000) and with acceptable performances in 2 year (AUC: 0.7765) and 3 year (AUC: 0.7647). These indicate the cash flow based credit risk model is useful in assessing the credit quality of construction contractors. In addition, the cash flow based credit risk model is applicable in both listed and private construction contractors as it only requires information of accounting statements. Since only a small portion of construction contractors are rated by rating agency, the cash flow based credit model is especially useful in credit risk assessment of unrated construction contractors.
Subjects
construction industry
credit risk
cash flow based credit model
ROC curve
Type
thesis
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