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Predicting financial distress: revisiting the option-based model
Khushbu Agrawal,
Published in Emerald Publishing
Volume: 5
Issue: 2
Pages: 268 - 284


The purpose of this paper is to assess the significance of the Merton distance-to-default (DD) in predicting defaults for a sample of listed Indian firms.


The study uses a matched pair sample of defaulting and non-defaulting listed Indian firms. It employs two alternative statistical techniques, namely, logistic regression and multiple discriminant analysis.


The option-based DD is found to be statistically significant in predicting defaults and has a significantly negative relationship with the probability of default. The DD retains its significance even after the addition of Altman’s Z-score. This further establishes its robustness as a significant predictor of default.


The study re-establishes the utility of the Merton model in India using a simplified version of the Merton model that can be easily operationalized by practitioners, reasonably larger sample size and is done in a more recent period covering the post global financial crisis period. The findings could be valuable to banks, financial institutions, investors and managers.

About the journal
JournalData powered by TypesetSouth Asian Journal of Global Business Research
PublisherData powered by TypesetEmerald Publishing
Open AccessNo