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The Impact of Recession on the Prediction of Corporate Failure

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  • Frederick M. Richardson
  • Gregory D. Kane
  • Patricia Lobingier

Abstract

In this paper, we hypothesize that recessionary business cycles can contribute to corporate failure. Specifically, we test for a relationship between failure and (1) knowledge that failure occurred during a recession and (2) knowledge that the predictor variables were measured during a recession. We are able to show that accounting‐based logistic regression models used to predict corporate failure are sensitive to the occurrence of a recession. Furthermore, our results indicate that such models are sensitive to knowledge that the predictor variables were generated during a recession and to knowledge that failure ultimately occurred during a recession.

Suggested Citation

  • Frederick M. Richardson & Gregory D. Kane & Patricia Lobingier, 1998. "The Impact of Recession on the Prediction of Corporate Failure," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 25(1‐2), pages 167-186, January.
    • Handle: RePEc:bla:jbfnac:v:25:y:1998:i:1-2:p:167-186
    DOI: 10.1111/1468-5957.00182
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    Cited by:

    1. Josep M. Argilés, 1998. "Accounting information and the prediction of farm viability," Economics Working Papers 277, Department of Economics and Business, Universitat Pompeu Fabra.
    2. Konstantinos Bozos & Timothy King & Dimitrios Koutmos, 2022. "CSR and Firm Risk: Is Shareholder Activism a Double-Edged Sword?," JRFM, MDPI, vol. 15(11), pages 1-22, November.
    3. Andrikopoulos, Panagiotis & Khorasgani, Amir, 2018. "Predicting unlisted SMEs' default: Incorporating market information on accounting-based models for improved accuracy," The British Accounting Review, Elsevier, vol. 50(5), pages 559-573.
    4. Balcaen, Sofie & Ooghe, Hubert, 2006. "35 years of studies on business failure: an overview of the classic statistical methodologies and their related problems," The British Accounting Review, Elsevier, vol. 38(1), pages 63-93.
    5. Lensberg, Terje & Eilifsen, Aasmund & McKee, Thomas E., 2006. "Bankruptcy theory development and classification via genetic programming," European Journal of Operational Research, Elsevier, vol. 169(2), pages 677-697, March.
    6. Yung-Ho Chiu & Yu-Chuan Chen & Yu Han Hung, 2009. "Basel II and bank bankruptcy analysis," Applied Economics Letters, Taylor & Francis Journals, vol. 16(18), pages 1843-1847.
    7. Salwa Kessioui & Michalis Doumpos & Constantin Zopounidis, 2023. "A Bibliometric Overview of the State-of-the-Art in Bankruptcy Prediction Methods and Applications," World Scientific Book Chapters, in: Emilios Galariotis & Alexandros Garefalakis & Christos Lemonakis & Marios Menexiadis & Constantin Zo (ed.), Governance and Financial Performance Current Trends and Perspectives, chapter 6, pages 123-153, World Scientific Publishing Co. Pte. Ltd..
    8. du Jardin, Philippe & Séverin, Eric, 2012. "Forecasting financial failure using a Kohonen map: A comparative study to improve model stability over time," European Journal of Operational Research, Elsevier, vol. 221(2), pages 378-396.
    9. David S. Jenkins & Gregory D. Kane & Uma Velury, 2009. "Earnings Conservatism and Value Relevance Across the Business Cycle," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(9‐10), pages 1041-1058, November.
    10. VLADU ALINA BEATTRICE Author-Workplace-Name: BABES-BOLYAI UNIVERSITY CLUJ-NAPOCA, 2013. "EARNINGS MANGEMENT OCCURENCE IN TIMES OF CRISIS: INSIGHTS FROM THE LITERATURE Abstract: This paper discusses the main findings in the literature and offers interesting insights in order to understandi," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 5, pages 115-119, October.
    11. Paul P. M. Pompe & Jan Bilderbeek, 2005. "Bankruptcy prediction: the influence of the year prior to failure selected for model building and the effects in a period of economic decline," Intelligent Systems in Accounting, Finance and Management, John Wiley & Sons, Ltd., vol. 13(2), pages 95-112, June.
    12. Shu Hui Lan & Jia Yi Cheng & Sheng Guo, 2016. "How to Build up the Loan - Evaluation System toward Small and Medium Enterprises between Taiwan and China’s Commercial Banks？ The Application for Multi Criteria Decision Making," International Business Research, Canadian Center of Science and Education, vol. 9(3), pages 121-142, March.
    13. Struckell, Elisabeth & Ojha, Divesh & Patel, Pankaj C. & Dhir, Amandeep, 2022. "Strategic choice in times of stagnant growth and uncertainty: An institutional theory and organizational change perspective," Technological Forecasting and Social Change, Elsevier, vol. 182(C).
    14. Montserrat Manzaneque-Lizano & Esteban Alfaro-Cortés & Alba María Priego de la Cruz, 2019. "Stakeholders and Long-Term Sustainability of SMEs. Who Really Matters in Crisis Contexts, and When," Sustainability, MDPI, vol. 11(23), pages 1-27, November.
    15. Filip, Andrei & Raffournier, Bernard, 2014. "Financial Crisis And Earnings Management: The European Evidence," The International Journal of Accounting, Elsevier, vol. 49(4), pages 455-478.
    16. Sorokina, Nonna Y. & Thornton, John H. & Patel, Ajay, 2017. "Why do banks choose to finance with equity?," Journal of Financial Stability, Elsevier, vol. 30(C), pages 36-52.

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