Accounting Fraud and the Pricing of Corporate Liabilities: Structural models with garbling

DefaultRisk.com the web's biggest credit risk modeling resource.

Submit Your Paper

Fitch Ratings Jobs

[ Worldwide]

Post Your Résumé
For Recruiters

Featured Book

Paris-Princeton Lectures on Mathematical Finance 2004 Finance 2004
by Rene A. Carmona, Ivar Ekeland, Arturo Kohatsu-Higa, Jean-Michel Lasry, Pierre-Louis Lions, Huyen Pham, Erik Taflin, Springer, (October 1, 2007), Paperback, 248 pages

Training Discounted for DefaultRisk.com visitors only:

The Mathematics of Credit Derivatives: The Essential Credit Modelling and Pricing Companion
by Philipp J. Schönbucher,
WBS Training, August 2003, DVD / Interactive CD-ROM

Sponsor:
Shop at Amazon.com and support DefaultRisk.com

Accounting Fraud and the Pricing of Corporate Liabilities: Structural models with garbling

by Angelo Baglioni of the Catholic University – Milan, and
Umberto Cherubini of the University of Bologna

February 2005

Abstract: We provide a method for modelling accounting distortions and their impact on the value of corporate liabilities. Our model is able to account for both small noise (estimate errors) and large mis-representations (deliberate fraud). Such a methodology is then applied to structural pricing models, in the spirit of Merton (1974). It turns out that accounting distortions may be a relevant factor in the pricing of corporate securities: indeed, they are able to explain why credit spreads are actually larger than implied by traditional structural models, particularly on short maturities. Simulations show that such an effect is stronger for safer firms, namely those with lower leverage and asset volatility.

JEL Classification: D82, G12, G30, M41.

Keywords: Accounting, Information, Asset pricing, Credit spreads.

Books Referenced in this Paper: (what is this?)