A Barrier Option Framework for Predicting Insolvency of Construction Firms

• Main Authors: Hao-Wei Chin, 秦浩瑋
• Other Authors: Hui-Ping Tserng
• Format: Others
• Language: en_US
• Published: 2009
• Online Access: http://ndltd.ncl.edu.tw/handle/88776999330418693166

碩士 === 國立臺灣大學 === 土木工程學研究所 === 97 === Evaluating the financial failure probability of a construction firm has always been an important topic that the government, contractors, project owners, financial lending institutions, and investors highly concerned with. However, construction industry has distinguishing financial characteristics comparing to other industries, and therefore traditional valuation models no longer fit. This research provides a framework of security valuation based on barrier option model, usually known as first-passage approach. First of all, the data is collected from the construction firms that are listed in North America of recent 30 years. The empirical results show that the implied barriers are statistically significant. Next, failure probability implied by barrier option model can be estimated. The research tests the predictive ability of implied failure probability against Altman Z-score, and find that implied failure probability dominates Z-score in long-term cases. Furthermore, the research analyzes the correlation between implied failure probability and financial ratios which is often used in construction industry. Finding significant ratios, the research finally develop another discriminant function which is more suitable for construction industry. In brief, this paper implements the implied default barrier to construction industry, and expects to construct a financial predictive model for a single industry. Utilizing this model, owners and creditors can valuate contractors more precisely in advance, and contractors can avoid facing financial crisis themselves as well.