The prediction of the default probability for construction firms by using the Logit model
Date Issued
2010
Date
2010
Author(s)
Tran, Quang-Hung
Abstract
Abstract
The recent bankruptcies of some construction companies have underlined the importance of default prediction in this industry. It now seems to be more necessary than ever to develop early warning systems that can help prevent or avert corporate default and that facilitate the selection of firms to collaborate with or invest in.
One of the most important original evaluation tools for the strength of a firm is its financial statements. This research will provide a framework of the default probability valuation relying on the financial ratios by using the Logit model. First of all, according to some paper, a total of 21 ratios will be taken into the calculation of the default probability. These ratios will be gathered into 5 groups according to the characteristics. Next, by using the Logit model for single variable analysis to validate the data following to the leave-one-out method, and then the fitting of the model will be validated by using ROC curve. The results will be the default probability, the area under ROC curve and the optimal cut-off point of each variable correlatively. Relying on the experimental results, the thesis will point out seven highlight factors, which have strong effect and can be used as a stand-alone factor for the prediction of a firm’s default probability. They are ROA (AUC = 0.783), Debt ratio (AUC = 0.6529), Account payable turnover (AUC = 0.6922), Quick ratio (AUC = 0.56), Current ratio AUC = 0.5832), Net working capital to total asset (AUC = 0.6123), Turnover of total assets (AUC = 0.5989). After the impact of the single ratios will be recognized, some of them will be selected for gathering into some combination for multi-variables analysis. Finally, the importance of the market factor as well as the effectiveness of considering the financial factors simultaneously to the default probability prediction will be proven. The criterion points also are calculated for warning those who concern about the default probability of a firm by analyzing its financial statement.
Subjects
Default probability
Financial ratios
Logit model
ROC curve
Construction industry
Type
thesis
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