Predicting Construction Contractor Default with Barrier Option Model
Publication: Journal of Construction Engineering and Management
Volume 138, Issue 5
Abstract
This is the first study to apply the barrier option model to predict defaults of construction contractors and to assert that the path-dependent characteristic of the model is very suitable for describing the behavior of contractor default. Different from existing contractor-default prediction models, this research uses a much larger contractor sample in empirical analyses to alleviate sample-selection biases, and employs a Receiver Operating Characteristics (ROC) curve to assess the model performance. Empirical results of this study show that the proposed model outperforms traditional financial ratio models in differentiating the risk of defaulted and nondefaulted construction contractors. Additionally, the barrier option model has markedly better discriminatory power than when applied to non–construction-related industries. The results of this paper support the postulation that the barrier option model has significant advantages for the construction industry.
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Acknowledgments
We are thankful to an anonymous referee for suggesting Altman’s (2000) Z-score model as a benchmark in this research.
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Information & Authors
Information
Published In
Journal of Construction Engineering and Management
Volume 138 • Issue 5 • May 2012
Pages: 621 - 630
Copyright
© 2012. American Society of Civil Engineers.
History
Received: Apr 9, 2010
Accepted: Aug 9, 2011
Published online: Aug 11, 2011
Published in print: May 1, 2012
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