The structure of ownership has substantial implications on the accounting measure of
performance return on equity (ROE). A company’s performance ROE is inversely proportional to
government shares and, in comparison to non-defaulted companies, ownership of firms in default has a
heavier implication. Similarly, firms that show high foreign ownership bare a minor impact of default.
Government proprietorship is considerably adversely correlated to the company’s likelihood of default,
thus, statistics of both mix structure ownership and concentration ones might be applied in forecasting
the possibility of default as the government ownership fraction (FGO) and the biggest five
shareholders (C5) have to a large extent a reverse correlation in regard to evasion. A conclusion can be
further drawn from the results thus reduction of government involvement improves productivity. This
can also end up in insolvency of firms eventually.
Higher liquidity facilitates for sale of stocks by block holders more conveniently. On the face
of it, the risk of exit can perform the function of an efficacious mechanism in corporate governance
(Admati and Pfleiderer, 2009; Edmans, 2009; Edmans and Manso, 2011). Effective corporate
governance enhances competence among managers. It persuades them to undertake investments that
enhance their firm’s value and protects against the shrewd and unprincipled behaviour in management,
possibly resulting in lowering of the likelihood to default. It is possible for the average application of
the Capital Asset Pricing Model to be inefficient in capturing the default risk-premium
comprehensively if company shortcomings are interconnected with the decline in investment prospects
or components of wealth that might be unaccounted for, like for example; human resource and liability
From the valuation of earned returns made the assumption is, the ex-post and ex-ante projected
income have a direct relationship. The final returns can be a representation of the projections made in
accordance with Elton (1999). Elton gives examples of the correlation existing between gained return
and risks involved which can be detrimental. He points out the probability of absence of actual
statistical events like, immense shocks. Auditors come in at this juncture where there is an impact of
unexpected statistics on stocks which cannot be explained by analysis done.
Build a logical argument for a specific relationship between two variables (i.e., a theoretical
framework), using established research published in academic journals. Start by identifying your
theoretical framework, naming the theory, identifying key theoretical constructs that you will be
considering and formulate a prediction of the relationship based on the theory. You may want to refer
to a seminal article (founding or highly influential publication of research that has informed later
research in that field).
Carefully review past research, the variables that have been tested in previous studies, and the findings.
Highlight differences or inconsistencies. You might have mentioned these in your theoretical
motivation – as part of the reason for your study.
Build an argument for a specific relationship between two variables: clearly define the two variables;
explain how these two variables are understood to be linked; and outline the reasons there may be a
relationship between them. Critically discuss the strengths and limitations of the existing (past)
research and use this to justify the argument for a modification or a new application of the theory.
Then draw your conclusion about the predicted relationship for the variables that you plan to test. The
argument must lead to a specific prediction (to be stated in the next section) that can be tested. This
will lead to your hypothesis.
Length: the longest part of your assignment. Most of the words and several paragraphs beginning with
topic sentences and linking to each other.
Clearly state your testable and falsifiable hypotheses – these are predictions. Express your hypotheses
in the alternative form where appropriate. A single hypothesis is sufficient.
Length: one sentence (per hypothesis)
List of References:
Chava, S. and Purnanandam, A., 2010. Is default risk negatively related to stock returns?. The Review
of Financial Studies, 23(6), pp.2523-2559.
Dichev, I. 1998. Is the Risk of Bankruptcy a Systematic Risk? Journal of Finance 53:1131–48
Brogaard, J., Li, D. and Xia, Y., 2017. Stock liquidity and default risk. Journal of Financial
Economics, 124(3), pp.486-502.
Gianfrate, G., 2020. Climate Change and Credit Risk. Journal of Cleaner Production.
Edmans, A., Manso, G., 2011. Governance through trading and intervention: a theory of multiple
blockholders. Rev. Financ. Stud. 24. 2395-2428.
Merton, R. C. 1973. An Intertemporal Capital Asset Pricing Model. Econometrics 41:867–87.
Zeitun, R. and Tian, G.G., 2007. Does ownership affect a firm's performance and default risk in
Jordan?. Corporate Governance: The international journal of business in society.
Ham, C. and Koharki, K., 2016. The association between corporate general counsel and firm credit
risk. Journal of Accounting and Economics, 61(2-3), pp.274-293.
Admati, AR., Pfleiderer, P., 2009.The “Wallstreet Walk” and shareholder activism: exit as a form of
voice. Rev. Financ. Stud. 22,2645-2685’
Fama, E. F., and K. R. French. 1996. Multifactor Explanation of Asset Pricing Anomalies. Journal of
Elton, E. J. 1999. Expected Return, Realized Return, and Asset Pricing Tests. Journal of Finance
Campbell, J. Y., J. Hilscher, and J. Szilagyi. 2008. In Search of Distress-Risk. Journal of Finance
Edmans, A., 2009.Blockholder trading, market efficiency,and managerial myopia. J. Finance 64, 2451-
Ferguson, M. F., and R. L. Shockley. 2003. Equilibrium Anomalies. Journal of Finance 58:2549–80
Appendix I – Annotated Bibliography for Selected Articles
Title Journal Type of
Summary of contribution to the research
question (100 words)
Dv refers to
that is the
IV on the
This is the
value of an
If default risk is systematic, then investors
should demand a positive risk-premium for
bearing this risk. The standard
implementation of the capital asset pricing
model (CAPM) might fail to completely
capture the default risk-premium if corporate
failures are correlated with deterioration in
investment opportunities or unmeasured
components of wealth such as human capital
and debt securities. Contrary to what the
CAPM predicts, recent empirical studies
document a negative relationship between
default risk and realized stock returns in the
post-1980 period. This evidence suggests that
the cost of equity capital decreases with
default risk, a finding that also has important
implications for corporate financial policies.
Stock liquidity can impact default risk for a
number of reasons. Increasing liquidity can
increase default risk if it exacerbates noise
trading, leading to greater firm mispricing
and higher volatility. Greater liquidity can
also decrease internal firm monitoring.
Alternatively, higher liquidity could decrease
default risk by improving price efficiency or
improving corporate governance through
easing investors’ ability to exit, provide
empirical evidence that liquidity increases
firm value. Even so, the effect of stock
liquidity on default risk is not mechanical as
default risk can be nonlinear and it depends
on several factors other than firm value.
Climate change risk can impact financial
stability through three channels. First,
physical risks such as extreme
meteorological, hydrological and other
climatological events are affecting the value
of financial assets worldwide. Second,
liability risks stemming from the increased
compensation paid to economic agents
affected by climate change. Finally, transition
risks may result from the adjustment of asset
prices towards a low-carbon economy.
Transition risks are specifically materializing
where greater disclosure of carbon footprint
is required and new regulation creates
obligations to move towards a lower-carbon
economy. In particular, by putting a price on
greenhouse gas emissions a growing number
of countries is bringing down emissions and
driving private investments into cleaner
p affect a
Geographical position, the tax system,
industrial development and cultural
characteristics along with other factors affect
ownership structure which in turn have
impacts on a firm’s performance and its
default risk. Noteworthy also is, the
prevalence in the public sector institutions
and corporations of a large degree of
inefficiency in the administrative and
employment policies, squander of public
funds, administrative archaism, substandard
services and high indebtedness, while the
private sector firms were yielding higher
returns and results and generating better job
opportunities, given the high level of
efficiency in the administrative and
employment policies. Therefore, it is
expected that the privatization in Jordan can
affect a firm’s performance and the
probability of default in a positive way.
Firms' credit risk can be impacted by a
reliance on GCs who excessively focus on
capital raising, firm restructuring, and firm
strategy, as well as GCs who allow the firm
to become overly aggressive in dealings with
suppliers, customers, and other stakeholders.
As the GC takes on these new responsibilities
including helping to ensure sustained
corporate performance and anticipating how
changes in the legal environment will impact
the company's business over time, seeking to
expand the role that law and legal practice
play to generate new sources of growth, as
well as to gain an economic edge over
competition, he/she is likely to place less of
an emphasis on the gatekeeping functions
and more of an emphasis on the facilitating
functions, thereby potentially reducing the
effectiveness of the GC's internal monitoring.
In support of this notion, I maintain that bond
market participants anticipate a potential
increase in GCs' facilitating role relative to
their gatekeeping role when included among
senior management, resulting in increased
credit risk for these firms.