A Study of Literature on Corporate Default Predictors

With the recent historic meltdown of global economies, with some of the long standing and firms of repute facing closure due to economic failure a need has come for existing businesses to start taking preventive measures in order to save themselves of the plight suffered by some of the most illustrious companies of the world. In order to do this, companies must start to retrospect their internal risk management systems objectively and subjectively, lending and investment policies previously adopted by them. Moreover we see a growing trend of capital providers adopting a capital preservation model over the growth model and accounting for default risk in their model is the need of the hour In this report, various models and techniques have been explained which have been developed by statistical and economic experts to predict financial distress over the past 5 decades and use the same in ranking companies/industries in order of their financial health. It has examined the most widely used and relevant prediction models and techniques of predicting default of the firms today. Most of these models focus on the fundamentals of the firm's business. To couple this we have included a model which includes the fundamentals of the firms with the macroeconomic variables in the firm's environment. The models we have discussed below have incorporated the fundamental risks of a business i.e. business risk and financial risks that a firm has to face and overcome for its long run survival. Further to that businesses are prone to risk which are not reflected in the balance sheet of the companies. Such risks are known as off balance sheet risks. Study incorporates the type and of off balance sheet transactions which elevates such risks. The data has been collected from the various research papers, Reuters database and websites