title: Three essays on corporate default prediction : special reference to corporate governance, default correlation and capital structure dynamics

authors: Fernando, Ruwani

subjects: Default prediction

abstract: This thesis consists of three essays that investigate corporate defaults connected to corporate governance, default correlations and capital structure adjustment. Granting a loan requires mutual trust between lenders and borrower and depends on the flow of information. The relevance and the accuracy of the information are necessary to ensure the best judgement about the creditworthiness of borrowers. However, information asymmetry between the borrower and the lender is the main hurdle for any judgement about the borrower. Although default prediction has commanded the attention of researchers over many years, there is still an important gap in the literature on the selection of the suitable default predictor information for improved borrower evaluation. 
To broaden the understanding of the information content of default predictor variables, the first essay addresses and tests the impact of corporate governance on default prediction. It examines several testable hypotheses regarding the relations between corporate governance and default prediction, building on the Standard and Poor (2002) corporate governance framework proposed by Ashbaugh-Skaife et al. (2006). The research employs the conventional logistic regression to provide empirical evidence from U.S. default data over the period of 2000 to 2015. Empirical results are consistent with the following notions: First, default firms are associated with high ownership concentration, low shareholder rights, low financial transparency and disclosures, and less board effectiveness. 
Second, in-sample and out-of-sample tests support the incremental contribution of corporate governance information on default prediction, when compared with the models involving just financial information. 
In addition to the analyses on the U.S. data, this thesis conducts a comparative study using the data of Sri Lanka, which serves as a representative emerging market. This study argues that emerging markets are important because they present several institutional differences that cannot be examined in the developed markets. The rapid evolvement of these markets provides excellent experimental grounds for studying many financial issues. The empirical results show that whilst an integrated model provides overall stronger predictive value; financial information is more relevant for USA firms. Corporate governance appears more relevant in emerging markets than in mature markets, but the effectiveness of the individual corporate governance practices differs between countries. 
The second essay discusses the impact of corporate governance on the correlation in corporate defaults. This essay investigates for the first time the effect of firm-specific corporate governance on default correlation as an extension to the contagion and cyclical effect proposed by Das et al. (2007) as the sources of default correlation. It hypothesizes that the degree of default correlations could increase disproportionally for firms with weak corporate governance in terms of high ownership concentration, low board effectiveness, low financial transparency, and higher shareholder rights. This study employs Lucas’s (1995) method to provide empirical evidence based on the historical default data from the United States from 2000 to 2015. The empirical results imply that corporate governance is essential for credit risk management because poor corporate governance may increase not only individual default risk but also the domino effect of credit defaults. Moreover, the impact of corporate governance on the correlation in corporate defaults is more pronounced in the financial crisis.
The third essay examines the heterogeneity of the speed of capital structure adjustment in firms. In contrast to previously documented contemporaneous results, it tests the issue through distinguishing two types of the firms (default and non-default firms), and two measures of the speed of adjustment (cumulative versus marginal). The empirical results show that the speed of adjustment is non-uniform across firms and over time. In particular, default firms are associated with a higher speed of adjustment than non-default firms. The completion of leverage adjustment takes multiple periods. The marginal speed of adjustment accelerates from the beginning period to the end period, which is consistent with the anchoring and adjustment bias heuristic. The empirical results are robust using a book/market leverage and a two/one-step estimation approach. In addition to the tests on the speed of capital structure adjustment, this essay also examines the effect of leverage deviation on measuring firms’ default risk. The in-sample and out-of-sample tests suggest that taking into account leverage deviation enhances the capacity of measuring corporate borrowers’ default risk. Additionally, such benefit is persistent over various time horizons. Overall, the empirical findings provide important policy implications for banks before granting loans to corporate customers. This work fills crucial gaps in the credit risk literature.

text: Three essays on corporate default prediction : special reference to corporate governance, default correlation and capital structure dynamics This thesis consists of three essays that investigate corporate defaults connected to corporate governance, default correlations and capital structure adjustment. Granting a loan requires mutual trust between lenders and borrower and depends on the flow of information. The relevance and the accuracy of the information are necessary to ensure the best judgement about the creditworthiness of borrowers. However, information asymmetry between the borrower and the lender is the main hurdle for any judgement about the borrower. Although default prediction has commanded the attention of researchers over many years, there is still an important gap in the literature on the selection of the suitable default predictor information for improved borrower evaluation. 
To broaden the understanding of the information content of default predictor variables, the first essay addresses and tests the impact of corporate governance on default prediction. It examines several testable hypotheses regarding the relations between corporate governance and default prediction, building on the Standard and Poor (2002) corporate governance framework proposed by Ashbaugh-Skaife et al. (2006). The research employs the conventional logistic regression to provide empirical evidence from U.S. default data over the period of 2000 to 2015. Empirical results are consistent with the following notions: First, default firms are associated with high ownership concentration, low shareholder rights, low financial transparency and disclosures, and less board effectiveness. 
Second, in-sample and out-of-sample tests support the incremental contribution of corporate governance information on default prediction, when compared with the models involving just financial information. 
In addition to the analyses on the U.S. data, this thesis conducts a comparative study using the data of Sri Lanka, which serves as a representative emerging market. This study argues that emerging markets are important because they present several institutional differences that cannot be examined in the developed markets. The rapid evolvement of these markets provides excellent experimental grounds for studying many financial issues. The empirical results show that whilst an integrated model provides overall stronger predictive value; financial information is more relevant for USA firms. Corporate governance appears more relevant in emerging markets than in mature markets, but the effectiveness of the individual corporate governance practices differs between countries. 
The second essay discusses the impact of corporate governance on the correlation in corporate defaults. This essay investigates for the first time the effect of firm-specific corporate governance on default correlation as an extension to the contagion and cyclical effect proposed by Das et al. (2007) as the sources of default correlation. It hypothesizes that the degree of default correlations could increase disproportionally for firms with weak corporate governance in terms of high ownership concentration, low board effectiveness, low financial transparency, and higher shareholder rights. This study employs Lucas’s (1995) method to provide empirical evidence based on the historical default data from the United States from 2000 to 2015. The empirical results imply that corporate governance is essential for credit risk management because poor corporate governance may increase not only individual default risk but also the domino effect of credit defaults. Moreover, the impact of corporate governance on the correlation in corporate defaults is more pronounced in the financial crisis.
The third essay examines the heterogeneity of the speed of capital structure adjustment in firms. In contrast to previously documented contemporaneous results, it tests the issue through distinguishing two types of the firms (default and non-default firms), and two measures of the speed of adjustment (cumulative versus marginal). The empirical results show that the speed of adjustment is non-uniform across firms and over time. In particular, default firms are associated with a higher speed of adjustment than non-default firms. The completion of leverage adjustment takes multiple periods. The marginal speed of adjustment accelerates from the beginning period to the end period, which is consistent with the anchoring and adjustment bias heuristic. The empirical results are robust using a book/market leverage and a two/one-step estimation approach. In addition to the tests on the speed of capital structure adjustment, this essay also examines the effect of leverage deviation on measuring firms’ default risk. The in-sample and out-of-sample tests suggest that taking into account leverage deviation enhances the capacity of measuring corporate borrowers’ default risk. Additionally, such benefit is persistent over various time horizons. Overall, the empirical findings provide important policy implications for banks before granting loans to corporate customers. This work fills crucial gaps in the credit risk literature.

year: 2019

title: Evaluating detection limits of next-generation sequencing for the surveillance and monitoring of international marine pests

authors: Pochon, Xavier

abstract: Most surveillance programmes for marine invasive species (MIS) require considerable taxonomic expertise, are laborious, and are unable to identify species at larval or juvenile stages. Therefore, marine pests may go undetected at the initial stages of incursions when population densities are low. In this study, we evaluated the ability of the benchtop GS Junior™ 454 pyrosequencing system to detect the presence of MIS in complex sample matrices. An initial in-silico evaluation of the mitochondrial cytochrome c oxidase subunit I (COI) and the nuclear small subunit ribosomal DNA (SSU) genes, found that multiple primer sets (targeting a ca. 400 base pair region) would be required to obtain species level identification within the COI gene. In contrast a single universal primer set was designed to target the V1–V3 region of SSU, allowing simultaneous PCR amplification of a wide taxonomic range of MIS. To evaluate the limits of detection of this method, artificial contrived communities (10 species from 5 taxonomic groups) were created using varying concentrations of known DNA samples and PCR products. Environmental samples (water and sediment) spiked with one or five 160 hr old Asterias amurensis larvae were also examined. Pyrosequencing was able to recover DNA/PCR products of individual species present at greater than 0.64% abundance from all tested contrived communities. Additionally, single A. amurensis larvae were detected from both water and sediment samples despite the co-occurrence of a large array of environmental eukaryotes, indicating an equivalent sensitivity to quantitative PCR. NGS technology has tremendous potential for the early detection of marine invasive species worldwide.

text: Evaluating detection limits of next-generation sequencing for the surveillance and monitoring of international marine pests Most surveillance programmes for marine invasive species (MIS) require considerable taxonomic expertise, are laborious, and are unable to identify species at larval or juvenile stages. Therefore, marine pests may go undetected at the initial stages of incursions when population densities are low. In this study, we evaluated the ability of the benchtop GS Junior™ 454 pyrosequencing system to detect the presence of MIS in complex sample matrices. An initial in-silico evaluation of the mitochondrial cytochrome c oxidase subunit I (COI) and the nuclear small subunit ribosomal DNA (SSU) genes, found that multiple primer sets (targeting a ca. 400 base pair region) would be required to obtain species level identification within the COI gene. In contrast a single universal primer set was designed to target the V1–V3 region of SSU, allowing simultaneous PCR amplification of a wide taxonomic range of MIS. To evaluate the limits of detection of this method, artificial contrived communities (10 species from 5 taxonomic groups) were created using varying concentrations of known DNA samples and PCR products. Environmental samples (water and sediment) spiked with one or five 160 hr old Asterias amurensis larvae were also examined. Pyrosequencing was able to recover DNA/PCR products of individual species present at greater than 0.64% abundance from all tested contrived communities. Additionally, single A. amurensis larvae were detected from both water and sediment samples despite the co-occurrence of a large array of environmental eukaryotes, indicating an equivalent sensitivity to quantitative PCR. NGS technology has tremendous potential for the early detection of marine invasive species worldwide.

year: 2013

title: Evaluation of iwi and hapū participation in the resource consents processes of six district councils

authors: Backhurst, Michael

subjects: New Zealand

abstract: This working paper analyses the processes adopted by councils for involving hapū/iwi in plan implementation, including the resource consents process. Three topic issues were investigated to assess plan implementation — urban amenity, storm water, and issues of importance to iwi. Questions were asked about the capacity of hapū/iwi to engage in the resource consent process, which resource issues were of concern to them, their relationship with council and consent applicants, and their perception of the consent process. Most resources listed in the questionnaire were of concern to hapū/iwi, with water quality, wāhi tapu and heritage the most commonly cited. In conclusion, we found a general dissatisfaction on the part of hapū/iwi with councils’ performance with respect to both Treaty relationships and consent processing under the RMA. A further contributing factor to the poor relationships found between hapū/iwi and councils, was the lack of clarity over the role of hapū and iwi in resource management. In several districts, diverging responses from hapū/iwi and councils to questions about level of understanding and commitment suggests there is a need for more effective communication. These problems are compounded by the generally low capacity of hapū/iwi to participate in resource consent processes. These findings suggest that there is much to be done to improve relationships and behaviour of these key stakeholder groups in the plan implementation process if key provisions in the RMA related to hapū/iwi interests are to be fulfilled. The differences shown in reciprocal perceptions have serious implications for establishing a sound working partnership between councils and hapū/iwi in their areas. Making clear these discrepancies is a first step towards taking the measures needed for building a better partnership. Further, the capacity of hapū/iwi to participate could be better utilised if there was greater integration between regional and district councils on issues of significance and processes for iwi involvement.

text: Evaluation of iwi and hapū participation in the resource consents processes of six district councils This working paper analyses the processes adopted by councils for involving hapū/iwi in plan implementation, including the resource consents process. Three topic issues were investigated to assess plan implementation — urban amenity, storm water, and issues of importance to iwi. Questions were asked about the capacity of hapū/iwi to engage in the resource consent process, which resource issues were of concern to them, their relationship with council and consent applicants, and their perception of the consent process. Most resources listed in the questionnaire were of concern to hapū/iwi, with water quality, wāhi tapu and heritage the most commonly cited. In conclusion, we found a general dissatisfaction on the part of hapū/iwi with councils’ performance with respect to both Treaty relationships and consent processing under the RMA. A further contributing factor to the poor relationships found between hapū/iwi and councils, was the lack of clarity over the role of hapū and iwi in resource management. In several districts, diverging responses from hapū/iwi and councils to questions about level of understanding and commitment suggests there is a need for more effective communication. These problems are compounded by the generally low capacity of hapū/iwi to participate in resource consent processes. These findings suggest that there is much to be done to improve relationships and behaviour of these key stakeholder groups in the plan implementation process if key provisions in the RMA related to hapū/iwi interests are to be fulfilled. The differences shown in reciprocal perceptions have serious implications for establishing a sound working partnership between councils and hapū/iwi in their areas. Making clear these discrepancies is a first step towards taking the measures needed for building a better partnership. Further, the capacity of hapū/iwi to participate could be better utilised if there was greater integration between regional and district councils on issues of significance and processes for iwi involvement.

year: 2004-03