Gurmeet S. Bhabra

DEA as a tool for bankruptcy assessment: A comparative study with logistic regression technique

This paper proposes data envelopment analysis (DEA) as a quick-and-easy tool for assessing corporate bankruptcy. DEA is a non-parametric method that measures weight estimates (not parameter estimates) of a classification function for separating default and non-default firms. Using a recent sample of large corporate failures in the United States, we examine the capability of DEA in assessing corporate bankruptcy by comparing it with logistic regression (LR). We find that DEA outperforms LR in evaluating bankruptcy out-of-sample. This feature of DEA is appealing and has practical relevance for investors. Another advantage of DEA over LR is that it does not have assumptions associated with statistical and econometric methods. Furthermore, DEA does not need a large sample size for bankruptcy evaluation, usually required by such statistical and econometric approaches. The need for such a large sample size is a significant disadvantage to practitioners when investment decisions are made using small samples. DEA can bypass such a difficulty related to a sample size. Thus, DEA is a practically appealing method for bankruptcy assessment.

Volatility prediction during prolonged crises: Evidence from Korean index options

Abstract This paper examines KOSPI200 index option prices in order to investigate whether index option implied volatilities foreshadowed the 1997 economic crisis in Korea. Results indicate the absence of strong fears of an impending market downturn prior to the crisis. Put option implied volatilities rose sharply as the crisis intensified, however, and the difference between put and call implied volatilities reached extreme levels compared to results found in previous studies of financial crises in developed markets. The study indicates that option traders reacted to the crisis rather than predicting its onset, perhaps reflecting the youthfulness of the market. Traders also appear to have learned from the crisis as it intensified.

Cash Flow, Investment and Derivative Use: An Empirical Analysis of New Zealand Listed Companies

Using a sample of non-financial New Zealand companies we examine whether firms that use financial derivative instruments are more financially constrained compared to those that do not hedge. We find a significantly positive relationship between derivative usage and financial leverage and a significantly negative relationship between derivative usage and liquidity suggesting that these firms may be financially constrained. Consistent with this observation, we also find that firms that use derivatives exhibit significantly higher sensitivity of investments to internal cash flows compared to firms that do not use derivatives, suggesting that investment for these firms are reliant on availability of internally generated funds. Finally, we find that among the firms that use derivatives, the sensitivity of investment to cash flows is a decreasing function of firm size suggesting that regardless of the derivative use status, larger firms have better access to external capital compared to small firms.

CORPORATE GOVERNANCE IN SINGAPORE: THE IMPACT OF DIRECTORS’ EQUITY OWNERSHIP

We examine whether the curvilinear relationship between directors’ equity ownership and firm performance exists in a non-Western economy such as Singapore. We find that it does, although the inflection points are much higher than that generally cited for U.S. firms. We then compare this relationship across two kinds of firms that are not common to the U.S. marketplace. We observe for founder-controlled firms that the impact of director ownership is insignificant. We also examine government-linked corporations and in spite of the presence of a government blockholder, find that the pattern of alignment, entrenchment and then alignment remains operative.

Did the Sarbanes-Oxley Act Have the Desired Effect? Evidence from the Marginal Value of Corporate Cash Holdings

We examine whether passage of the Sarbanes-Oxley Act (SOX) in 2002 did in fact have the intended effect of reducing agency conflicts or did it alter managerial incentives in ways that could be detrimental to firm value. Our findings for the full sample suggest a decrease in firm value and the marginal value of cash collectively suggesting that either the provisions imposed by SOX resulted in significant compliance costs and/or lead to an increase in risk aversion of managers resulting in costs of lost opportunity. There is, however, evidence of a significant variation in the ability of the various provisions to constrain incentives of managers with some leading to reduced agency conflicts while others having the perverse effect of increasing both managerial risk aversion as well as imposing excessive costs of compliance.

Diversification and Firm Value in New Zealand

We find that diversified firms in New Zealand are associated with a value discount of 35% and that such firms also perform poorly relative to single-segment undiversified firms. We find no link, however, between the lower value of diversified firms and either their poor performance or the presence of agency conflicts. After controlling for endogeneity in the relationship between diversification and firm value, diversification does not explain the cross-sectional variation in the value discount. These findings suggest that performance and value discounts observed for diversified companies in our sample may be related to unobserved firm and industry attributes such as lack of growth opportunities that are systematically related to the decision to diversify rather than to diversification itself.