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Institute of Public Finance

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Credit Risk Assessment of Corporate Sector in Croatia

Lana Ivičić, Croatian National Bank, Zagreb, Croatia
Saša Cerovac, Croatian National Bank, Zagreb, Croatia

The main goal of this paper is modeling credit risk of non-financial businesses entities by assessing the rating migration probabilities and predicting the probability of default over one year horizon on the basis of corporate financial accounts. Our research provides a number of new important insights. Ratings migration matrices are symmetrical in every observed period, which implies that default state is not final terminal state. We find a high degree of rating stability, with the exception of some volatility generated by firms in the middle of the ratings scale. In the period of lower economic growth probabilities of transition between different risks categories are lower than in the period of higher economic growth. Probabilities of default are relatively stable across enterprises operating in different economic activities. After considering a wide range of potential predictors of default, multivariate logistic regression results reveal that the most important are the ratio of shareholders' equity to total assets and the ratio of EBIT to total liabilities, both negatively related to the probability of default. In addition, higher liquidity, profitability and sales as well as construction and real estate sector affiliation all decrease the companies' probability of default in the following year. The model correctly classifies relatively reasonable percentage of companies in the sample (74% of all the companies, 71% of defaulted and 75% of nondefaulted companies) when the threshold is set in such a way to maximize the sum of correctly predicted proportions for both defaulted and nondefaulted companies.

Keywords:  credit risk, corporate default, migration matrices, logit

Year:  2009   |   Volume:  33   |   Issue:  4   |   Pages:  373 - 399

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 December, 2009
IV / 2009
EBSCO Publishing
ISSN 1846-887X
e-ISSN 1845-9757
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