CH03:Les modèles théoriques du risque de défaillance des entreprises Flashcards
(14 cards)
What is business default risk?
It is the risk that a firm will be unable to meet its financial obligations, typically resulting from deteriorating liquidity, solvency, or profitability.
How does business failure differ from bankruptcy?
Business failure refers to financial distress or inability to meet obligations, while bankruptcy is a legal process triggered by insolvency.
What are the two main types of bankruptcy costs?
Direct costs (legal, administrative) and indirect costs (reputation damage, lost sales, higher financing costs).
What is the core idea of the Trade-Off Theory of capital structure?
Firms balance the tax benefits of debt against the expected costs of financial distress to determine optimal leverage.
What is the main purpose of default prediction models?
To estimate the likelihood that a firm will default, based on financial and sometimes qualitative variables.
What is a univariate default prediction model?
A model that uses a single financial ratio (e.g., cash flow/total debt) to predict default risk.
What is the Altman Z-score model?
A multivariate model using discriminant analysis that combines five financial ratios into a single score to assess bankruptcy risk.
What is a limitation of univariate models?
They ignore correlations and combined effects between financial variables, which can lead to misleading conclusions.
What is a logit model?
A logistic regression model that estimates the probability of default using the log-odds transformation of explanatory variables.
What is a probit model?
A regression model similar to logit, but based on the normal distribution of errors; it also estimates default probability.
How do logit and probit models differ?
Logit uses a logistic (S-shaped) curve; probit uses a normal distribution curve. Logit is more interpretable; probit is more theoretical.
What role do financial ratios play in default prediction?
They serve as indicators of financial health, commonly used as inputs in all types of default prediction models.
What is a key weakness of the Altman Z-score?
It assumes fixed weights, linearity, and doesn’t adapt easily to different sectors or updated data.
Why are logit/probit models used under Basel II/III?
Because they estimate probabilities of default, which are essential for internal risk rating systems (IRB) in regulatory frameworks.
