An Empirical Test of Option Based Default Probabilities using Payment Behavior and Auditor Notes

@inproceedings{Farmen2007AnET,
  title={An Empirical Test of Option Based Default Probabilities using Payment Behavior and Auditor Notes},
  author={Tom E. S. Farmen and Nico van der Wijst and Sjur Westgaard},
  year={2007}
}
This paper empirically tests the hypotheses from the Black and Scholes, Merton framework (BSM) concerning the probability of default. Payment behavior and auditor notes are used as proxy variables for financial distress. The results show that the standard deviation of equity is the most significant parameter when predicting financial distress, but also the equity ratio (equity to total assets) has a significant influence. An increase in the volatility of equity increases the probability of… CONTINUE READING

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