Huang, Y L and Lin, W (2010) Does debt structure matter? Estimating contractor default barrier by the down-and-out call option approach. Construction Management and Economics, 28(9), pp. 947-958. ISSN 1466433X
Abstract
The down-and-out call option approach was used to analyse contractor financial risk under shorter-term debt structures. The maximum likelihood method was applied to estimate contractor default barriers and probabilities implied by stock prices series and actual debt maturities calculated from historical debt data. Results indicate that the default barriers implied by shorter-term debt structures are higher than previous estimates using longer-term debt structures. Further regression analysis shows that implied barriers do not reflect the full effects of asset quality in ameliorating financial distress. Hence, the implied default barriers tend to be higher than the actual default barriers. When applying the DOC approach, if the implied barrier is not calibrated to reflect the borrower's asset quality, the barrier will tend to overestimate default probability. This has important implications on contractor financial risk monitoring, security pricing and short-term financial planning.
| Item Type: | Article |
|---|---|
| Uncontrolled Keywords: | down-and-out call option; financial planning; financial risk; maximum likelihood method; regression analysis |
| Index terms: | pricing, estimate, regression analysis, option, financial distress, monitoring, financial planning, default, estimating |
| Subjects: | dispute resolution, control systems, economic analysis, financial and cost management, decision analysis, statistical analysis |
| Topics: | Cost Management, Business Strategy, Research Practice, Risk Management, Legal Issues, Site Management |
| Descriptive scope: | 3 PCA |
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