Operational cycle and tax liabilities as determinants of corporate credit risk

Luciana Barbosa, Paulo Pinho

Research output: Contribution to journalArticle

Abstract

Liquidity and turnover indicators are usually mentioned as important dimensions in the corporate credit risk literature. However, these variables may reflect different firms' operational activity management and efficiency. In this article, we investigate if information on these firms' allow us to improve the assessment of firm's financial positions and in determining its probability of a bank credit default event. For this, we explore the breakdown of working capital and turnover into variables related to cash, activity indicators, investment, and tax liabilities. According to the results obtained, we observe that firms that take longer to repay their suppliers, or firms whose purchase stay longer as
inventories, have higher probabilities of a credit default event. Moreover, there is evidence of a positive relationship between firms' credit risk and the share of tax liabilities in total assets. These indicators seem to be signals about a firm's financial fragilities. (JEL: G21, G33,C25)
Original languageEnglish
Pages (from-to)37-72
JournalBanco de Portugal Economic Studies
Volume3
Issue number3
Publication statusPublished - 2017

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