In the last two decades, corporate failures have increased mainly due to credit booms and asset price bubbles and as a result, a series of financial crises have emerged. These events have significantly highlighted the economic, social, and political consequences globally. Hence, the series of financial crises emerging from corporate defaults, recent rise in nonperforming loans, and excessive reliance on bank credit due to fledgling corporate bond markets in emerging Asian countries highlight the need for estimating the default risk of individual firms. Besides, the rippling effect of corporate defaults on banks and the financial system, regional contagion among integrated financial markets have further motivated us to assess the corporate default risk in the emerging Asian countries. This research study addresses the following research gaps from the existing literature on default risk.

First, structural default risk models are widely used to estimate the immediate default risk due to its forward-looking properties. The corporate bond markets are illiquid in emerging countries and therefore, structural default risk models suffer from ‘market-bias’ in emerging Asia due to uneven scaling between the book value of debt and the market value of equity. Hence, this study examines the application of the existing Merton (1974) model and proposes the extension of the Merton (1974) model to adjust emerging market vulnerabilities. Second, the market-based models are superior assuming the financial markets are frictionless. However, financial markets are not efficient and price discovery of stocks depends on many unseen factors. Therefore, the study also analyses the impact of firm-level fundamentals to predict the default risk. Third, the macro-economic environment plays a vital role in nurturing a business. It is also important in spreading the default risk using asset correlation or default correlation. Therefore, this study explores the impact of macro-economic variables on default risk in emerging Asian countries.

This study provides useful insights to many stakeholders such as investors to hedge against the portfolio tail risk, financial institutions to evaluate the borrower’s financial condition and ensures financial stability, and regulators to safeguard economic stability by tightening the credit risk management norms for all the firms, in particular, high net worth firms since the recent default anecdotes exhibit the failure of highly successful firms.