The prediction of default for high yield bond issues

Stephen P. Huffman and David J. Ward

Review of Financial Economics, 1996, vol. 5, issue 1, 75-89

Abstract: Bondholders and financial analysts have long sought models which will predict financial distress in corporations. Prior research has produced a number of useful models to predict bankruptcy in the short term. This paper looks at four models which predict default based upon public information at the time of issuance of high yield bonds. Multivariate results using logistic regression analysis indicate that high yield issues that default are characterized by having higher asset growth rates, lower operating profit margins, larger levels of collateralizable assets, and larger changes in net working capital. Models using Altman (1968) variables have lower likelihood ratio indexes than models employing alternative explanatory variables. Predictive ability tests of models excluding the traditional variables on a holdout sample are able to correctly predict 73.3 percent of the defaulted bonds and 68.6 percent of the nondefaulted bonds.

Date: 1996
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https://doi.org/10.1016/S1058-3300(96)90007-5

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Persistent link: https://EconPapers.repec.org/RePEc:wly:revfec:v:5:y:1996:i:1:p:75-89

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