Examining the explanatory capability of financial ratios in determining the insolvency risk of Iranian banks (Accounting- and market-based methods)

The banking industry in Iran is responsible for the short- and long-term financing of economic activities due to insufficient development of the capital market and inefficiencies in this market. Consequently, it is important to study and evaluate the risk of insolvent banks. The main objective of this paper is to examine the explanatory capability of accounting ratios on the bankruptcy risk of banks in Iran. In order to evaluate the efficiency of different financial ratios in explaining banks’ insolvency, two different ratios were used as dependent variables to represent the risk of insolvency quantitatively. These two ratios are common ratios calculated by different approaches. In the first approach, the information in the financial statements is used to calculate the z-Score index, and in the second one, the Distance-to-Default parameter is calculated from market information. Independent variables are divided into three categories of profit variables, variables related to asset and deposit management, and variables related to the quality of granted loans. Using the unbalanced data panel, we examined the effectiveness of these variables on the two risk factors of insolvency. The research sample included banks which are members of Securities and Exchange Organization of Iran during 2002-2016. The results of the research showed that the explanatory capability of variables are in the same direction in the two approaches.

کلیدواژه ها:

insolvency risk ، panel data regression ، accounting-based Z-Score index ، market-based distance-to-default index