Track: Financial Engineering

Abstract

The bankruptcy risk or corporate failure risk is an important risk that the portfolio manager has to take into consideration, when choosing the stock shares to build an optimal portfolio. In this paper, the researchers investigate the relationship of listed firm financial distress level and the trend of the firm share prices.

The stock prices trend will be divided into three categories (Increasing Trend, Stable Trend and Dimensioning Trend) and using an innovative criteria by applying Factor Analysis and simple Analytic Geometry on eight financial distress symptoms (Net Income, Earnings Before Interest Tax Depreciation and Amortization (EBITDA), Net Change in Cash Flow, Net Operating Cash Flow, Net Operating Working Capital, Retained Earnings, Change in Equity & Net Operating Profit); in order to create three comparable categories (Healthy Firm, Stable Firm & Distressed Firm), according the resulted grading scale. The sample has drawn from S&P 500, consists of 32 firms, is covering six-year time span (2010-2015).

The analysis of the correlation between all possible segmentations of the financial health levels leads to: there is no correlation between technical analysis, represented in price trend forecasting and fundamental analysis, represented in financial distress assessment. And so the researchers should integrate them to obtain more optimal portfolio beside accurate corporate valuation.

Key Words

Portfolio Management, Corporate Failure Alert & Stock Price Trend Forecasting