Default Probability for the Jordanian Companies: A Test of Cash Flow Theory

Rami Mohammad Ahmad Zeitun · Gary Gang Tian · Steve Keen

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Financial Distress and Bankruptcy Prediction Corporate Finance and Governance Corporate Insolvency and Governance

Abstract

Abstract This paper aims to investigate the effect of cash flow and free cash flow on corporate failure in the emerging market in particular Jordan using two samples; matched sample and a cross sectional time-series (panel data) sample representative of 167 Jordanian companies in 1989-2003. LOGIT models are used to outline the relationship between firms’ financial health and the probability of default. Our results show that there is firm’s free cash flow increases corporate failure. The result also shows that the firm’s cash flow decreases corporate failure. Firms’ capital structures are fund a mental in predicting default. Capital structure is seen as the main factor affecting the probability of default as it affects a firm’s ability to access external sources of funds. Jordanian firms depend on short-term debt for both short and long term financing.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1984Corporate financing and investment decisions when firms have information that investors do not have 1986Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers 1968FINANCIAL RATIOS, DISCRIMINANT ANALYSIS AND THE PREDICTION OF CORPORATE BANKRUPTCY 1972Conditional logit analysis of qualitative choice behavior 1983Limited-dependent and qualitative variables in econometrics 1974ON THE PRICING OF CORPORATE DEBT: THE RISK STRUCTURE OF INTEREST RATES*1980Financial Ratios and the Probabilistic Prediction of Bankruptcy

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