An Empirical Comparison of Bankruptcy Models

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An Empirical Comparison of Bankruptcy Models

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Mossman, Charles E, et al

Abstract

Four types of bankruptcy prediction models based on financial statement ratios, cash flows, stock returns, and return standard deviations are compared. Based on a ample of bankruptcies from 1980 to 1991, results indicate that no existing model of bankruptcy adequately captures the data. During the last fiscal year preceding bankruptcy, none of the individual models may be excluded without a loss in explanatory power. If considered in isolation, the cash flow model discriminates most consistently two to three years before bankruptcy. By comparison, the ratio model is the best single model during the year immediately preceding bankruptcy. Quasi-jack-knifing procedures suggest that none of the models can reliably predict bankruptcy more than two years in advance. Copyright 1998 by MIT Press.

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Article provided by Eastern Finance Association in its journal The Financial Review.

Volume (Year): 33 (1998)
Issue (Month): 2 (May)
Pages: 35-53
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Handle: RePEc:bla:finrev:v:33:y:1998:i:2:p:35-53

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Maurice Peat, 2003. "Factors Affecting the Probability of Bankruptcy," Working Paper Series 130, School of Finance and Economics, University of Technology, Sydney. [Downloadable!]

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