Studying the Relationship between Default Risk and Corporate Governance Indicators (Using the Black-Scholes-Merton Option Pricing Model)

Subject Areas : Financial engineering

Mir Feiz  Fallah Shams ¹ (Associate Professor and Faculty Member, Islamic Azad University, Central Tehran Branch)
Maysam  Ahmadvand ² (Ph.D Student in Finance, Allameh Tabatabaei University)
Hadi  Khajezadeh Dezfuli ³ (Ph.D Student in Finance, Allameh Tabatabaei University)

Received: 2016-11-07 Accepted : 2016-12-22 Published : 2017-04-21

Keywords: Tehran Stock Exchange, Corporate governance, Default risk, Black-Scholes-Merton (BSM) Option Pricing Model,

Abstract :

This paper analyzes the role of corporate governance indicators in default risk focusing on data from a 60-‌member sample of firms listed on Tehran stock exchange during 1389 to 1393. In this paper, default risk was calculated by a measure based on the Black-Scholes-Merton (BSM) option pricing model, where a firm’s default risk is derived from the market prices of its shares. This method overcomes some of the problems associated with the default risk measures used in prior studies. Moreover, corporate governance indicators were divided into four categories: (1) shareholders’ and stakeholders’ rights, (2) board of directors and its committees, (3) auditing, and (4) transparency and public disclosure. Based on each of these categories, a representative index, and by aggregating four representative indexes, a composite corporate governance index was built. Then, the relationship between these indexes and default risk was examined. Results suggest that only governance indicators relating to transparency and public disclosure, at 5% level, are significantly correlated with default risk. However, combining these indicators with other governance indicators (that is, indicators related to shareholders’ and stakeholders’ rights, board of directors and its committees, and auditing), did not have any significant influence on default risk of Tehran stock exchange listed firms.