Mind the tail, or risk to fail

Jairaj Gupta and Sajid Chaudhry

Journal of Business Research, 2019, vol. 99, issue C, 167-185

Abstract: In this study we hypothesise that more frequent extreme negative daily equity returns result in higher tail risk, and this subsequently increases firms' likelihood of entering financial distress. Specifically, we investigate the role of Value-at-risk and Expected Shortfall in aggravating firms' likelihood of experiencing financial distress. Our results show that longer horizon (three- and five-year) tail risk measures contributes positively toward firms' likelihood of experiencing financial distress. Additionally, considering the declining number of bankruptcy filings, and increasing out-of-court negotiations and debt reorganisations, we argue in favour of penalising firms for becoming sufficiently close to bankruptcy that they have questionable going-concern status. Thus, we propose a definition of financial distress contingent upon firms' earnings, financial expenses, market value and operating cash flow.

Keywords: Tail risk; Value-at-risk; Downside risk; Expected shortfall; Bankruptcy; Financial distress (search for similar items in EconPapers)
JEL-codes: C53 G17 G33 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbrese:v:99:y:2019:i:c:p:167-185

DOI: 10.1016/j.jbusres.2019.02.037

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