Indian Journal of Science and Technology

Abstract

Background/Objectives: Investment sources are allocated to economic activities through financial markets. One important topic is studying and evaluation of credit risks that is breach probability for reimbursement of granted facilities by customers. Methods/Statistical Analysis: This research evaluated the effects of financial flexibility independent variable on the probability of default dependent variable. This was investigated by gathering data from 101 companies receiving bank facilities from 2009 to 2013. To measure credit risk of companies, KMV Model has been used. The study hypotheses tested using combinational data, and for data analyzing and evaluating multi-variable regression model and study’s hypotheses test, we used E-views software. Findings: This research identifies some of the effective factors related to financial flexibility, as one of the modern financial patterns and strategies, affecting probability of default. The results show that there is a reverse and significant relation between financial flexibility and default probability. Also, there is a reverse and significant linear relation between flexibility and default probability of companies with high and low financial leverages, too with small and large sizes. Thus, relation rate varies in different levels of firm sizes and financial leverages, which indicates the effect of company size and financial leverage variables on relations between independent and dependent variables. Application/Improvements: Regarding to the results, it is recommended that banks andfinancial institutions and companies that sell credits notice financial flexibility, financial leverage, company sizes, and the effects of these variables on debt default when granting facilities.
Keywords: Credit Risk, Financial Flexibility, KMV Model, Leverage, Probability of Default, Size