Review of Quantitative Finance and Accounting

, Volume 36, Issue 4, pp 517–532

A flow-based corporate credit model

Original Research

DOI: 10.1007/s11156-010-0186-z

Cite this article as:
Chen, TK., Liao, HH. & Lu, CW. Rev Quant Finan Acc (2011) 36: 517. doi:10.1007/s11156-010-0186-z

Abstract

The main purpose of this paper is to develop a flow-based corporate credit model. This model can concurrently and endogenously generate a firm’s multi-period probabilities of liquidity crunch and expected liquidity shortfalls. This study builds a state-dependent internal liquidity model that incorporates both systematic and idiosyncratic shocks into corporate internal liquidity dynamics. The flow-based credit model differs from structural form credit models in that it considers a flow-based insolvency rather than a stock-based one, and has a potential to capture short-term credit information. Additionally, it differs from both reduced form and traditional accounting-based bankruptcy prediction models in that it is able to provide multi-period expected liquidity shortfalls endogenously.

Keywords

Internal liquidityLiquidity crunchFlow-based credit model

JEL Classification

G32M41

Copyright information

© Springer Science+Business Media, LLC 2010

Authors and Affiliations

  1. 1.Department of Finance and International BusinessFu Jen Catholic UniversitySinjhuang City, Taipei CountyTaiwan, ROC
  2. 2.Department of FinanceNational Taiwan UniversityTaipei CityTaiwan, ROC
  3. 3.Department of FinanceProvidence UniversityTaichung CountyTaiwan, ROC