The informational content of subordinated debt and equity prices in the presence of bankruptcy costs

The paper extends the contingent valuation framework of Black and Cox [J. Finance 31(2) (1976) 351] to value subordinated debt by explicitly incorporating bankruptcy costs in the model. We show that the information from subordinated debt prices is complementary to the information from the equity prices only when the bankruptcy costs are taken into account. In fact, the joint use of equity and subordinated debt prices can provide information on magnitude of expected bankruptcy costs. Knowing the magnitude of expected bankruptcy costs is necessary for calculating variables underlying policy objectives. In particular, it is illustrated that the value of expected liability of a deposit insurer would be underestimated if the bankruptcy costs were not taken into account.     

Predicting the event and time horizon of bankruptcy using financial ratios and the maturity schedule of long-term debt

We study the problem of simultaneous and coherent assessment the probability of a firm’s bankruptcy at various time horizons in future. In contrast with usual (one-period) formulations of the problem, such multi-period formulation better matches the nature of bankruptcy process (bankruptcy occurs in time) and allows an easier and more natural incorporation of bankruptcy (default) prognoses in valuation of risky debt and equity, optimization of corporate capital structure etc. The study uses a new mathematical apparatus—multi-alternative decision rules of statistical decision theory. We investigate a new type of predictive variables that can be extracted from the maturity schedule of a firm’s long-term debt. The study develops Bayesian-type forecasting rules that use both maturity schedule factors and traditional financial ratios. These rules noticeably enhance bankruptcy prediction (compared with the familiar one-period Z-score rules of Altman) for bankruptcy within the first 1, 2 or 3 years. Predictive factors derived from schedule information enhance bankruptcy prediction at distant time horizons.     

The pseudo-average rule: bankruptcy,cost allocation and bargaining

A division rule for claims problems, also known as bankruptcy or rationing problems, based on the pseudo-average solution is studied (for 2-person problems). This solution was introduced in Moulin (Jpn Econ Rev 46:303–332, 1995) for discrete cost allocation problems. Using the asymptotic approach, we obtain a division rule for claims problems. We characterize the division rule axiomatically and show that it coincides with the rule associated to the equal area bargaining solution (this is not true for n = 3). Moreover, following Moulin and Shenker (J Econ Theor 64:178–201, 1994), we show that its associated solution for continuous homogeneous goods is precisely the continuous pseudo-average solution.     

The Greek banking system: Reanalysis of performance

Zopounidis et al. used an ordinal regression analysis to assess an additive utility model and to obtain final ranking of a representative sample of commercial Greek banks [C. Zopounidis, D.K. Despotis, E. Stavropoulou, Multiattribute evaluation of Greek banking performance, Applied Stochastic Models and Data Analysis 11 (1995) 97–107]. In this paper, we reanalyze their data by means of a new multivariate analysis method called Co-plot, a two-dimensional graphic display technique designed to analyze observations (e.g., 16 banks) and attributes (e.g., 7 attributes) simultaneously. The method produces three results: (1) similarity among the banks by the composite of all attributes involved (five clusters are obtained), (2) the structure of correlations among the attributes (three clusters are obtained), and (3) the mutual relationships between the banks and the attributes. The banks are mapped into a partial order according to their (increased) performance to obtain their rating. The final ranking obtained by the Co-plot method differed from that obtained by Zopounidis et al.     

The reverse Talmud family of rules for bankruptcy Problems: A characterization

We characterize the reverse Talmud family of  rules for bankruptcy problems using consistency and additivity on a restricted domain of problems. The family includes several standard rules such as the constrained equal awards, constrained equal losses and reverse Talmud rules. This last rule is characterized by further imposing the mid-point property. Furthermore, each member of the RTAL-family is characterized using consistency and additivity on a domain in which that member is additive.     

The sources of productivity change in Spanish banking

In this paper we examine the pattern of productivity change in Spanish banking over the period 1986–1993. Two sectors dominate Spanish banking, commercial banks and the faster-growing savings banks. We begin by examining productivity change separately within each sector. However since the two sectors are gradually becoming more competitive, we continue by merging the two sectors, and by examining productivity change in the industry. The merging procedure follows a methodology originally proposed by Charnes, Cooper and Rhodes (1981), in which intra-sectoral managerial inefficiency is eliminated prior to merging. This procedure allows us to distinguish differences in managerial efficiency within each sector from differences in the institutional efficiency of the two sectors. It also enables us to decompose potential productivity change into institutional efficiency change, technical change, and the impact of scale economies. We find the commercial banks to have had a slightly lower rate of productivity growth, but a slightly higher rate of potential productivity growth. We attribute this phenomenon to differences in both managerial efficiency and institutional efficiency, to differences in the rate of technical progress, and to the adverse impact of diseconomies of scale in the commercial banking sector.     

The correlation matrix problem in insurance and banking

In insurance, the analyst is often faced with a large number of inter-related variables for which correlations need to be estimated. Clearly, all correlations lie in the interval [?1,?1], but the numbers cannot be assigned independently. Here, the choices left to the analyst are considered from both a geometric and a probabilistic viewpoint. In practice, the underwriter or risk manager may fix some of the correlations and this paper considers, from both these viewpoints, what effect this has on the analyst's choice of correlations between the remaining variables.     

The effects of asset liquidity on dynamic sell-out and bankruptcy decisions

We develop a dynamic bankruptcy model with asset illiquidity. In the model, a distressed firm chooses between sell-out and default, as well as its timing under the assumption that sell-out is feasible only at Poisson jump times, where the arrival rate of acquirers stands for asset liquidity. With lower asset liquidity, the firm increases the sell-out region to mitigate the risk of not finding an acquirer until bankruptcy. Despite the larger sell-out region, lower asset liquidity increases the default probability and decreases the equity, debt, and firm values. In the optimal capital structure, with lower asset liquidity, the firm reduces leverage, but the cautious capital structure does not fully offset the increased default risk. The stock price reaction caused by sell-out depends on the sell-out timing. When the firm’s asset value is not sufficiently high, the stock price jump size is an inverted U-shape with the economic state variable. Lower asset liquidity increases the jump size due to greater surprise. These results fit empirical observations.     

Optimization of costly measurements in stochastic decision processes

Summary Two kinds of problems regarding measurement optimization in stochastic decision processes, when measurements are costly or constrained not to exceed a given number, have been investigated in the last years: the first one refers to the optimum timing of observations on the state vector of the process, while the second refers to the convenience of buying information on the random actions exerted by a stochastic environment. In this paper the two problems are considered from a unified point of view. In other words, the decision maker has to determine the optimal observation policy, under the assumption that both state and random vectors are measurable. A solution based on the application of dynamic programming is discussed for a general class of multistage processes. Analytical results are then obtained for scalar linear systems with quadratic cost on state and control. In this case, an efficient algorithm to determine the optimal sequence of measurements is presented, on the base of which a sensitivity analysis with respect to the process parameters is also carried out.

---

Zusammenfassung In den letzten Jahren wurden zwei Typen von Problemen untersucht, die sich auf die Optimierung von Messungen bei stochastischen Entscheidungsprozessen beziehen, einmal der Fall, daß Messungen kostspielig sind, und zum anderen, daß deren Anzahl beschränkt ist. Der erste Fall bezieht sich auf die Gewinnung von Informationen über den stochastischen Störprozeß, der zweite Fall untersucht den optimalen Zeitabstand zwischen den Messungen des Zustands- (bzw. Ist-)-vektors. In diesem Beitrag wurden beide Probleme von einem gemeinsamen Gesichtspunkt aus betrachtet, d. h. der Entscheidungsträger soll die optimale Meßpolitik bestimmen, unter der Annahme, daß Zustands- und Störvektor meßbar sind. Mit Hilfe des Dynamischen Programmierens wird eine allgemeine Lösung des Problems hergeleitet. Sodann werden analytische Ergebnisse für den Fall linear-quadratischer Modelle angegeben. Schließlich wird ein wirksamer Algorithmus zur Bestimmung der optimalen Meßfolge entwickelt und darüber hinaus eine Sensitivitätsanalyse der Abhängigkeit von den Prozeßparametern durchgeführt.

---

---

This work has been supported by C. N. R. (National Council of Research) of Italy.     

Artificial neural networks in bankruptcy prediction: General framework and cross-validation analysis

In this paper, we present a general framework for understanding the role of artificial neural networks (ANNs) in bankruptcy prediction. We give a comprehensive review of neural network applications in this area and illustrate the link between neural networks and traditional Bayesian classification theory. The method of cross-validation is used to examine the between-sample variation of neural networks for bankruptcy prediction. Based on a matched sample of 220 firms, our findings indicate that neural networks are significantly better than logistic regression models in prediction as well as classification rate estimation. In addition, neural networks are robust to sampling variations in overall classification performance.     

Resource allocation games: a compromise stable extension of bankruptcy games

This paper presents an extension of the traditional bankruptcy problem. In a resource allocation problem there is a common-pool resource, which needs to be divided among agents. Each agent is characterized by a claim on this pool and an individual linear monetary reward function for assigned resources. Analyzing these problems a new class of transferable utility games is introduced, called resource allocation games. These games are based on the bankruptcy model, as introduced by O’Neill (Math Soc Sci 2:345–371, 1982). It is shown that the properties of totally balancedness and compromise stability can be extended to resource allocation games, although the property of convexity is not maintained in general. Moreover, an explicit expression for the nucleolus of these games is provided.     

Optimal dividends and bankruptcy procedures: Analysis of the Ornstein-Uhlenbeck process

This paper investigates the impact of bankruptcy procedures on optimal dividend barrier policies. We specifically focus on Chapter 11 of the US Bankruptcy Code, which allows a firm in default to continue its business for a certain period of time. Our model is based on the surplus of a firm that earns investment income at a constant rate of credit interest when it is in a creditworthy condition. The firm pays a debit interest rate that depends on the deficit level when it is in financial distress. Thus, the surplus follows an Ornstein-Uhlenbeck (OU) process with a negative surplus-dependent mean-reverting rate. Default and liquidation are modeled as distinguishable events by using an excursion time or occupation time framework. This paper demonstrates how the optimal dividend barrier can be obtained by deriving a closed-form solution for the dividend value function. It also characterizes the distributional property and expectation of bankruptcy time subject to the bankruptcy procedure. Our numerical examples show that under an optimal dividend barrier strategy, the bankruptcy procedure may not prolong the expected bankruptcy time in some situations.     

The banking system in Sicily: A territorial analysis for planning and marketing purposes

This study has as its main object the analysis of the most important structural aspects of the Sicilian banking system such as efficiency, competition/concentration, composition of deposits and loans, in order to:

• •- evaluate if the banking system scale was suitable for the real requirements of the island;
• •- find the most efficient distribution of our bank branches according to the criteria established by the Bank of Italy with regard to the authorisation for opening new branches or moving the existing ones.

The first part of the paper is devoted to the exposition of the criteria adopted to measure the competition and efficiency levels and to the presentation of the results obtained for Sicily.The second part is devoted to the methodology that we adopted for the subdivision of Sicily in ‘banking mobility areas’ to which our analysis can usefully refer (it is well known that concepts like competition and concentration are meaningful when they refer to adequate areas). The identified areas are not dependent on the administrative division and take into account the people's habitual mobility to utilize different community and social services (the banking services in particular). At a second stage the areas were economically characterized in an attempt to evaluate the credit demand from a quantitative and qualitative point of view, where the indications derived from the first part of the analysis were not sufficient. The economic reality of the areas is described by constructing indexes and utilizing data analysis techniques.     

DEMO: Towards a discipline of organisation engineering

Dynamic Essential Modelling of Organisation (DEMO) is a theory about the ‘construction’ and the ‘operation’ of organisations, that is rooted in the Communicative Action Paradigm regarding human communication and action. In this theory, the ‘working principle’ of an organisation consists of the entering into and the complying with commitments between human beings, where authority, responsibility and competence play an important role. The ‘construction’ of an organisation consists of a coherent whole of transactions, i.e., recurrent patterns of communication and action in which the commitments are entered into and complied with.DEMO is also a methodology for modelling, (re)designing and (re)engineering organisations based on that theory. Up to now some thirty projects have been carried out with DEMO. These projects are of very different kinds and they have been carried out in various types of organisations. The success factor has been the same for all these projects, namely the practical relevance of the concepts of DEMO, as well as their clear and precise definitions. Both managers and employees appear to be able to participate readily in identifying and understanding problems, and in generating appropriate and feasible solutions.     

Efficiency analysis in banking firms: An international comparison

The intensive process of financial European integration, together with the profound transformation and deregulation that has taken place in the Spanish banking system, justifies the evaluation of its efficiency in comparison with that of other banking systems. In this context, the aim of this study is to analyze the productivity, efficiency and differences in technology of several banking systems. Using a non-parametric approach together with the Malmquist index, we compare the efficiency, productivity and differences in technology of different European and US banking systems for the year 1992.     

Collateral in banking policy: On the possibility of signaling

In this paper we study the validity of the assertion that collateral is in a position to signal the degree of borrowers’ riskiness. We use a framework in which the cash flow from the risky project is described by means of a continuous density and projects are classified by second-order stochastic dominance. We show that if collateral is assumed bounded by the initial project outlay the positive role of collateral, namely truthfully conveying the private information about the project risk by the collateral amount, can no longer be ensured.     

The throughput performance of a prioritized LIFO service discipline

The LIFO service discipline maximizes throughput for certain queuing systems with delay-dependent customer behavior. To study the effects of priorities in such a system, we obtain delay distributions for each customer class of a K-class, single server system with nonpreemptive priorities and LIFO within each queue.     

The impact of information technology on the banking industry

This paper analyses the effects of investment in information technologies (IT) in the banking sector using bank-level data from a panel of 68 US banks over the period 1986–2005. Although IT can improve bank's performance by reducing operational cost (supply side), it can bring in competition among banks in order to embrace new technology (demand side). Since most empirical studies have adopted the production function approach, it is difficult to identify which effect has dominated. In a differentiated model with network effects, this paper characterizes the conditions to identify these two effects. The results suggest that (at individual firm levels) the bank profits can decline due to adoption and diffusion of IT investment, reflecting negative network competition effects in this industry. Using panel cointegration tests, we confirm that the estimated profit equation is indeed a long-run equilibrium relation.     

Axiomatic and game-theoretic analysis of bankruptcy and taxation problems: An update

A group of agents have claims on a resource but there is not enough of it to honor all of the claims. How should it be divided? A group of agents decide to undertake a public project that they can jointly afford. How much should each of them contribute? This essay is an update of Thomson (2003), a survey of the literature devoted to the study of such problems.