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A Brief Review of Catastrophe Theory and a Test in a Corporate Failure Context

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  • Gregory-Allen, Russell B
  • Henderson, Glenn V, Jr

Abstract

Catastrophe theory (CT) is a mathematical theory that attempts to describe a system exhibiting discontinuous behavior under continuous stimuli. Although CT has been used to describe corporate bankruptcy, this is an application that has not been tested. This paper reviews CT and provides such a test. We construct a time series of stock returns on companies that have filed for Chapter 11. Under certain, frequently occurring conditions, CT would predict a structural shift in firm stock returns as the date of filing is approached. Results confirm that such a shift does occur and in a way consistent with the CT prediction. Our findings both support the use of CT to describe corporate bankruptcy and raise questions about some techniques frequently used to study bankruptcies. Copyright 1991 by MIT Press.

Suggested Citation

  • Gregory-Allen, Russell B & Henderson, Glenn V, Jr, 1991. "A Brief Review of Catastrophe Theory and a Test in a Corporate Failure Context," The Financial Review, Eastern Finance Association, vol. 26(2), pages 127-155, May.
    • Handle: RePEc:bla:finrev:v:26:y:1991:i:2:p:127-55
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    Cited by:

    1. Błażej Prusak, 2018. "Review of Research into Enterprise Bankruptcy Prediction in Selected Central and Eastern European Countries," IJFS, MDPI, vol. 6(3), pages 1-28, June.
    2. Maurice Peat, 2001. "Bankruptcy Probability: A Theoretical and Empirical Examination," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 20, July-Dece.
    3. Bhimani, Alnoor & Gulamhussen, Mohamed Azzim & Lopes, Samuel Da-Rocha, 2010. "Accounting and non-accounting determinants of default: An analysis of privately-held firms," Journal of Accounting and Public Policy, Elsevier, vol. 29(6), pages 517-532, November.
    4. Westgaard, Sjur & van der Wijst, Nico, 2001. "Default probabilities in a corporate bank portfolio: A logistic model approach," European Journal of Operational Research, Elsevier, vol. 135(2), pages 338-349, December.
    5. Ana Paula Matias Gama & Helena Susana Amaral Geraldes, 2012. "Credit risk assessment and the impact of the New Basel Capital Accord on small and medium‐sized enterprises," Management Research Review, Emerald Group Publishing Limited, vol. 35(8), pages 727-749, July.
    6. Maurice Peat, 2001. "Bankruptcy Probability: A Theoretical and Empirical Examination," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 1-2001.

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