Comparing market-based and accounting-based credit models: A survey of the theoretical literature
Edith Cowan University
School of Business and Law
The paper examines two common types of corporate financial distress models, including (i) accounting-based models; and (ii) market-based models. While the accounting-based models use the analysis of financial statements to differentiate between distressed and non-distressed firms, market models utilise a combination of balance sheet items and volatility in market asset values of a firm to measure Distance to Default (DD). Findings from empirical studies using these models across countries and periods of time have provided mixed results. As such, the choice of an appropriate default models needs to factor in the unique circumstances of each credit portfolio.