Does ownership affect a firm’s performance and default risk in Jordan?

This paper seeks to examine the impact of ownership structure on firm performance and the default risk of a sample of publicly listed firms.

Default probability for the Jordanian companies: A test of cash flow theory

Abstract
This paper aims to investigate the effect of cash flow and free cash flow on corporate failure in the emerging market in particular Jordan using two samples; matched sample and a cross sectional time-series (panel data) sample representative of 167 Jordanian companies in 1989-2003. LOGIT models are used to outline the relationship between firms’ financial health and the probability of default. Our results show that there is firm’s free cash flow increases corporate failure. The result also shows that the firm’s cash flow decreases corporate failure. Firms’ capital structures are fund a mental in predicting default. Capital structure is seen as the main factor affecting the probability of default as it affects a firm’s ability to access external sources of funds. Jordanian firms depend on short-term debt for both short and long term financing.

Costly monitoring, dynamic incentives, and default

We study dynamic contracts between a lender and a borrower in the presence of costly state verification and hidden effort. We prove three results. Costly monitoring is employed by the lender to optimally limit history dependence and prevent future inefficient termination of the relationship. Due to interaction between costly monitoring and dynamic incentives, the probability of monitoring may fail to be monotone in the borrower's reservation utility. Finally, following the interpretation of the costly state verification literature, we distinguish two levels of bankruptcy: one associated with restructuring and the other with liquidation.

Book-to-market ratio, default risk and return implications: from a negative perspective

A paradox is created by the common practice in stock evaluation models of excluding stocks with a negative book equity (BE). If we interpret the book-to-market ratio as a proxy for distress risk, it makes no sense to exclude these negative BE stocks since they are, prima facie, most prone to distress risk. This paper reassesses the relationship between default risk, return and the book-to-market ratio by incorporating negative BE stocks into the study. We find that negative BE stocks carry higher default risks than their positive BE counterparts and that these risks are not totally offset by higher returns. This suggests that a default risk filter can be used in the investment universe selection process through which the portfolio return can be enhanced.

Should credit default swap issuers be subject to prudential regulation?

Credit default swaps (CDSs) contributed significantly to and exacerbated the recent global financial crisis. As a result of the major role that CDSs played, this paper argues that CDS issuers should be subject to prudential regulation, in order to improve systemic stability in the financial system. Three reasons are put forward for this proposition. First, CDSs are functionally equivalent to insurance and so should be regulated in a consistent manner. Secondly, CDSs perform the economic function of assuming credit risk, and so should be prudentially regulated in the same way as other financial institutions which assume credit risk. Finally, CDSs have the potential to contribute to systemic instability in the financial system, and prudential regulation would reduce this risk.