E3 Journal of Business Management and Economics

E3 Journal of Business Management and Economics Vol. 5 (1) pp. 017-025, January 2014; © E3 Journals; ISSN 2141-7482

An analysis on the characteristics of Financial condition change of Korean construction companies: Using KMV model

Abstract

Using the KMV model, which was developed based on the Black-Scholes option pricing theory, we calculated expected default frequencies (EDFs) of construction companies and compared and analyzed the characteristics of changes in their financial conditions for each category assigned, according to a corporate ranking of construction companies. Among the top 50 publicly traded companies of the construction capability index in South Korea, 28 companies were selected and analyzed in two groups: 14 upper and 14 lower companies. The quarterly data collection covered the period between Q1 2004 and Q4 2010. Confirming the a priori assumption, the upper group had better financial stability than the lower group. The financial condition of the lower group was insensitive to economic fluctuations. That is, we confirmed that a smaller company remained in the same aggravated financial condition. While the upper group companies had better financial stabilities than the lower group companies did, they tended to respond very sensitively to economic fluctuations. We verified that the upper group companies were more likely to incur conspicuous aggravation of financial situations under an abrupt economic fluctuation compared to the lower group companies.

Keywords: Financial Condition, Construction Companies, KMV Model, Expected Default Frequencies