Duration analysis of financial distress (Japan)

This thesis explores the application of duration models in estimating the probability of financial distress, such as company failure and bank closure events.; Chapter 1, Multi-Period Corporate Failure Prediction with Stochastic Covariates, provides maximum likelihood estimators of term structures of conditional probabilities of bankruptcy over relatively long time horizons, incorporating the dynamics of firm-specific and macroeconomic covariates. We find evidence in the U.S. industrial machinery and instruments sector, based on over 28,000 firm-quarters of data spanning 1971 to 2001, of significant dependence of the level and shape of the term structure of conditional future bankruptcy probabilities on a firm's distance to default (a volatility-adjusted measure of leverage) and on U.S. personal income growth, among other covariates. Variation in a firm's distance to default has a greater relative effect on the term structure of future failure hazard rates than does a comparatively sized change in U.S. personal income growth, especially at dates more than a year into the future.; Chapter 2, Banks under Government Pressure: A Duration Analysis of Bank Exits in Prewar Japan, examines how market selection and government policy worked together during 1926--1936 in Japan to determine the likelihood with which banks exited through failure, merger, or acquisition. Using a comprehensive dataset compiled by Okazaki, Sawada, and Yokoyama, we apply a competing-risk duration model with time-varying covariates to link bank-specific characteristics with each bank's risk of failure, merger, or acquisition. We find that banks with lower profits and a closer relationship with industrial companies were more likely to fail, but that these two characteristics were not significant factors in determining a bank's chances of being merged or acquired. This suggests that market pressure and prevailing government policy changed the Japanese banking market structure in different ways.