Jairaj Gupta

Empirical Comparison of Hazard Models in Predicting SMEs Failure

This study aims to shed light on the debate concerning the choice between discrete-time and continuous-time hazard models in making bankruptcy or any binary prediction using interval censored data. Building on theoretical suggestions from various disciplines, we empirically compare widely used discrete-time hazard models (with logit and clog-log links) and continuous-time Cox Proportional Hazards (CPH) model in predicting bankruptcy and financial distress of the United States SMEs. In line with the theoretical arguments we report that discrete-time hazard models are superior to continuous-time CPH model in making binary predictions using interval censored data. Moreover, hazard models that employ failure definition of SMEs based on bankruptcy laws and firms’ financial health exhibits superior goodness of fit and classification measures, in comparison to hazard models that employ failure definitions that are based either on bankruptcy laws or firms’ financial health.

Bankruptcy and Financial Distress in US Small and Medium Sized Enterprises

This study acknowledges the diversity between micro, small and medium-sized firms while predicting bankruptcy and financial distress of United States small and medium-sized enterprises. Empirical findings suggest that survival (failure) probability increases (decreases) with increasing firm size and firms in different size categories have varying determinants of bankruptcy, while factors affecting their financial distress are mostly invariant. Magnitude of significant covariates changes across the size categories of both bankrupt and financially distressed firms. Further, operating cash flow information does not add any marginal increment in prediction performance of multivariate hazard models above baseline models developed using information from income statements and balance sheets. This result holds for failure likelihood of SMEs as well as their respective size categories.

Determinants of telecommunication stock prices

Purpose - – The purpose of this paper is to analyze the determinants affecting the stock prices of telecommunications firms in both developed and developing countries around the world. Design/methodology/approach - – The empirical analysis is performed using panel data from 160 countries and 45 companies, covering the time period from 2000 to 2011. To identify the significant factors, company level firm-specific financial and non-financial factors have been analyzed that are expected to bear significant impact on price volatility of telecommunications stock. Findings - – The test results reveal that capital expenditure and book value are the most significant factors. Dividends and debt levels only affect prices significantly in specification tests with either time-series or cross-sectional effects, whereas firms’ earnings and numbers of mobile internet subscribers do not contribute to the explanatory power of telecommunication stock price variability. Practical implications - – The study sheds light to the potential investors in evaluating the risk associated with investment in stocks of telecommunications firms and take informed investment decisions. Originality/value - – This is the first study that presents a comprehensive analysis of determinants affecting the stock prices of telecommunications firms in both developed and developing countries around the world.

Impact of Market-Based Finance on SMEs Failure Likelihood

Capital Market-Based financing for Small and Medium-sized Enterprises (SMEs) is increasingly viewed as complementary to traditional bank-based financing for SMEs. In response, policymakers are recognising the need for better access of SMEs to capital markets and are making efforts to remove major impediments to their participation in capital markets. Thus, SMEs listed on stock exchanges benefit from better access to finance and reduced information asymmetry than their unlisted counterparts. This in turn shall lead to lower failure likelihood of listed SMEs. In this study, we empirically test this hypothesis and report that listed SMEs enjoy a lower likelihood of financial distress and bankruptcy than their unlisted counterparts. Although factors affecting financial distress of both listed and unlisted SMEs are almost identical, Average Marginal Effects of respective factors are strikingly higher for their unlisted counterparts. This suggests a higher vulnerability of unlisted SMEs due to changes in financial ratios. Due to the extremely low number of legal bankruptcy events, our hypothesis finds weak support when bankruptcy is used as the dependent variable in the regression analysis. Broadly, our findings support the view that stock exchange listing can relieve SMEs from external financing constraints, thus reducing their failure likelihood.

Impact of Market-Based Finance on SMEs Failure

Capital Market-Based financing for Small and Medium-sized Enterprises (SMEs) is increasingly viewed as complementary to traditional bank-based financing for SMEs. In response, policymakers are recognising the need for better access of SMEs to capital markets and are making efforts to remove major impediments to their participation in capital markets. Thus, SMEs listed on stock exchanges benefit from better access to finance and reduced information asymmetry than their unlisted counterparts. This in turn shall lead to lower failure likelihood of listed SMEs. In this study, we empirically test this hypothesis and report that listed SMEs enjoy a lower likelihood of financial distress and bankruptcy than their unlisted counterparts. Although factors affecting financial distress of both listed and unlisted SMEs are almost identical, Average Marginal Effects of respective factors are strikingly higher for their unlisted counterparts. This suggests a higher vulnerability of unlisted SMEs due to changes in financial ratios. Due to the extremely low number of legal bankruptcy events, our hypothesis finds weak support when bankruptcy is used as the dependent variable in the regression analysis. Broadly, our findings support the view that stock exchange listing can relieve SMEs from external financing constraints, thus reducing their failure likelihood.

Impact of Fund Size on Hedge Funds Liquidation

In this study, we propose a set of covariates that exploit information content of hedge funds’ relative size, performance, growth, tail risk, and past liquidation rate, in predicting their liquidation. Empirical results show that our proposed covariates exhibit significant predictive power for up to two years even when we control for fund specific characteristics. Furthermore, we estimate separate liquidation prediction models for small, medium, and large funds. Our findings suggest that liquidation likelihood of hedge funds is inversely related to fund size, and statistical significance of factors affecting their liquidation vary across different size categories.

Financial Distress and Downside Risk

In this study we hypothesise that more frequent extreme negative daily equity returns result in higher tail risk, and this subsequently increases firms’ likelihood of entering financial distress. Specifically, we investigate the role of Value-at-risk and Expected Shortfall in aggravating firms’ likelihood of experiencing financial distress. Our results show that longer horizon (three- and five-year) tail risk measures contributes positively toward firms’ likelihood of experiencing financial distress. Additionally, considering the declining number of bankruptcy filings, and increasing out-of-court negotiations and debt reorganisations, we argue in favour of penalising firms for becoming sufficiently close to bankruptcy that they have questionable going-concern status. Thus, we propose a definition of financial distress contingent upon firms’ earnings, financial expenses, market value and operating cash flow.

Listed vs Unlisted SMEs: A Comparison of Distress Hazard

Capital Market-Based financing for Small and Medium-sized Enterprises (SMEs) is increasingly viewed as complementary to traditional bank-based financing for SMEs. In response, policymakers are recognising the need for better access of SMEs to capital markets and are making efforts to remove major impediments to their participation in capital markets. Thus, SMEs listed on stock exchanges benefit from better access to finance and reduced information asymmetry than their unlisted counterparts. This in turn shall lead to lower failure likelihood of listed SMEs. In this study, we empirically test this hypothesis and report that listed SMEs enjoy a lower likelihood of financial distress and bankruptcy than their unlisted counterparts. Although factors affecting financial distress of both listed and unlisted SMEs are almost identical, Average Marginal Effects of respective factors are strikingly higher for their unlisted counterparts. This suggests a higher vulnerability of unlisted SMEs due to changes in financial ratios. Due to the extremely low number of legal bankruptcy events, our hypothesis finds weak support when bankruptcy is used as the dependent variable in the regression analysis. Broadly, our findings support the view that stock exchange listing can relieve SMEs from external financing constraints, thus reducing their failure likelihood.