Ashok Banerjee is currently the Departmental Head of Finance and Control, at the Indian Institute of Management (IIM) Calcutta. He joined IIM Calcutta as Professor (Finance and Control) in 2004 and has been instrumental in setting up the state-of-the-art Financial Research and Trading Laboratory (Finance Lab) there. He is also the founding member of Indian Finance Association.
Predicting Corporate Default using Text of Corporate Filings
Banks and financial institutions in emerging markets are saddled with a huge proportion of bad loans. Banking regulations require lenders to provide for troubled debt which adversely affects the profitability of banks. The capital market also reacts negatively to such write-offs of big ticket debts. Banks are, therefore, putting significant resources into developing early warning signals to arrest eventual default. The financial institutions use a wide range of default prediction models to estimate the loan loss. These models use data from financial statements and the market. The present study shows that such models fail to provide effective early warning signals. We use annual reports of companies to develop a default model which is predictive and hence has the capability of providing early warning signals. Using information from Directors’ Reports, Audit Reports and notes to accounts, our model successfully discriminates the ‘good’ firms from the ‘bad’ ones.