Winner of the Best Paper Prize at the 7th International Conference on Financial Markets, Good Governance, and Economic Development (2008) in Dar es Salaam, Tanzania. We thank Robert Faff (the editor), David Hillier, Allan Hodgson, Iain Clacher, Joshua Doriye, Francesco Vallascas, as well as the participants at the Institute of Finance Management in Tanzania for valuable comments. All remaining errors are our own.
Distance to default, subordinated debt, and distress indicators in the banking industry*
Article first published online: 2 NOV 2010
© 2010 The Authors. Accounting and Finance © 2010 AFAANZ
Accounting & Finance
Volume 50, Issue 4, pages 853–870, December 2010
How to Cite
Kato, P. and Hagendorff, J. (2010), Distance to default, subordinated debt, and distress indicators in the banking industry. Accounting & Finance, 50: 853–870. doi: 10.1111/j.1467-629X.2010.00354.x
- Issue published online: 2 NOV 2010
- Article first published online: 2 NOV 2010
- Received 20 November 2008; accepted 12 February 2010 by Robert Faff (Editor).
- Distance to default;
- Subordinated notes and debentures;
- Market discipline;
- Bank risk
The recent financial crisis has highlighted the inadequacy of present supervisory arrangements to identify reliable ex-ante indicators of banking distress. For a sample of US bank holding companies, we analyse the extent to which distance to default based on market data can be explained using accounting-based indicators of risk. We show that a larger number of bank fundamentals help predict default for institutions that issue subordinated debt. For banks that issue sub-debt, we find that higher charter values and low bank capitalizations further increase the power of bank fundamentals to predict default risk.