Don’t worry this isn’t going to be your typical “eat healthy and exercise!” guide. And I apologize for the crappy look it has but design isn’t my thing. Health however is! So let’s get down to business already!
It’s not secret that weight loss is not only a popular subject of discussion nowadays but it is also a very profitable industry. The reason I underlined the word “profitable” is because the rate of scams in the weight loss industry are increasing.
“Technical insolvency” is a phenomenon that a firm has surplus in financial statements but cannot fulfill its payment obligations. This phenomenon is especially worth noting during the recent market-wide financial crisis. In practice, liquidity crunch usually takes place before “stock-based” default (i.e. asset inadequacy default) because asset inadequacy relies upon the information generated by a time-lagged financial reporting system or, in many cases, by a complicated asset valuation process. Therefore, information on the probability of a liquidity crunch and the expected liquidity shortfall is important for determining the required internal liquidity reserve that supports a specific credit quality target, and is especially important for the periods of market liquidity crunch. However, existing Merton-type structural-form credit models ignore flow-based insolvency risk and consider only the difference between values of a firm’s assets and its liabilities.
Their most distinctive attribute is that they derive a firm’s asset value distribution from its equity market value and estimate its probability of default (PD) and recovery rate (RR) endogenously. Although researchers have developed many varieties from the original Merton model to overcome several major challenges to these models both in theory and practice, these modified models still barely consider corporate flow-based insolvency risk due to liquidity crunch. On the other hand, the reduced-form credit models, which are intensity-based, disregard any of a firm’s fundamental information, including internal liquidity, and rely on exogenous information such as credit ratings, recovery rates, or other default-related proxies to estimate a firm’s default probability. Consequently, they are limited in being able to provide the necessary information for credit risk management and to price liquidity related credit assets and derivatives. To fill this gap, this study develops an integrated structural-form credit risk model combining both stock-based an flow-based corporate credit risk information.
The objective of this paper is twofold. First, we investigate the relation between earnings quality and segment disclosure. Second, we analyze whether firms providing higher quality of segment information enjoy a lower cost of capital. For the analysis of the relation between earnings quality and segment disclosure we create an index of quantity of voluntary segment disclosure. We use the residuals of a regression of quantity of segment information on the determinants of segment disclosure as a proxy for the quality of segment disclosure. We argue that quality (and not quantity) of segment disclosure will have an impact on cost of capital.
We expect that earnings quality and segment disclosure will be related in a predictable way. The literature on information economics suggests that firms provide information to decrease information asymmetries (Grossman and Hart, 1980; Milgrom, 1981; Verrecchia, 1983). This provision of information could be achieved through several channels, including the reported accounting numbers and through additional disclosure. Verrecchia (1990) and Penno (1997) directly model the relation between earnings quality and disclosure, showing that more expansive disclosure is expected in firms with better earnings quality. However, results in the empirical literature are mixed, probably due to the use of empirical measures of disclosure that include information expected to be useful for investors (that disaggregates, explains or complements the reported numbers) and information that is difficult to verify and that might not be useful for investors.
