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On corporate financial distress prediction: What can we learn from private firms in a developing economy? Evidence from Greece

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  • Evangelos C. Charalambakis

    (Bank of Greece)

  • Ian Garrett

    (University of Manchester)

Abstract

Using a large dataset that includes nearly 31,000 Greek private firms we examine the determinants of the probability of corporate financial distress. Using a multi-period logit model, we find that profitability, leverage, the ratio of retained earnings-to-total assets, size, the liquidity ratio, an export dummy variable, the tendency to pay out dividends and the growth rate in real GDP are strong predictors of the probability of financial distress for Greek private firms. A model including these variables exhibits the highest in-sample and out-of-sample performance in terms of correctly classifying firms that went bankrupt as more likely to go bankrupt. The predictive ability of the model remains when we increase the forecast horizon, suggesting that the model works well over short and longer time horizons.

Suggested Citation

  • Evangelos C. Charalambakis & Ian Garrett, 2019. "On corporate financial distress prediction: What can we learn from private firms in a developing economy? Evidence from Greece," Review of Quantitative Finance and Accounting, Springer, vol. 52(2), pages 467-491, February.
    • Handle: RePEc:kap:rqfnac:v:52:y:2019:i:2:d:10.1007_s11156-018-0716-7
    DOI: 10.1007/s11156-018-0716-7
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    2. Frank Ranganai Matenda & Mabutho Sibanda & Eriyoti Chikodza & Victor Gumbo, 2022. "Bankruptcy prediction for private firms in developing economies: a scoping review and guidance for future research," Management Review Quarterly, Springer, vol. 72(4), pages 927-966, December.
    3. Chih‐Chun Chen & Chun‐Da Chen & Donald Lien, 2020. "Financial distress prediction model: The effects of corporate governance indicators," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 39(8), pages 1238-1252, December.
    4. Mundi, Hardeep Singh, 2022. "CEO social capital and capital structure complexity," Journal of Behavioral and Experimental Finance, Elsevier, vol. 35(C).
    5. Youssef Zizi & Amine Jamali-Alaoui & Badreddine El Goumi & Mohamed Oudgou & Abdeslam El Moudden, 2021. "An Optimal Model of Financial Distress Prediction: A Comparative Study between Neural Networks and Logistic Regression," Risks, MDPI, vol. 9(11), pages 1-24, November.
    6. Nusrat Jahan, 2022. "Macroeconomic Determinants of Corporate Credit Spreads: Evidence from Canada," Carleton Economic Papers 22-07, Carleton University, Department of Economics.
    7. Wei Xu & Yuchen Pan & Wenting Chen & Hongyong Fu, 2019. "Forecasting Corporate Failure in the Chinese Energy Sector: A Novel Integrated Model of Deep Learning and Support Vector Machine," Energies, MDPI, vol. 12(12), pages 1-20, June.
    8. Frank Ranganai Matenda & Mabutho Sibanda & Eriyoti Chikodza & Victor Gumbo, 2022. "Corporate Loan Recovery Rates under Downturn Conditions in a Developing Economy: Evidence from Zimbabwe," Risks, MDPI, vol. 10(10), pages 1-24, October.
    9. Puji Handayati & Tomy Rizky Izzalqurny & Slamet Fauzan & Nurus Shobah, 2022. "The phenomenon of financial distress of manufacturing companies in Indonesia during the Covid-19 Pandemic," International Journal of Research in Business and Social Science (2147-4478), Center for the Strategic Studies in Business and Finance, vol. 11(9), pages 166-173, December.
    10. Angeliki Papana & Anastasia Spyridou, 2020. "Bankruptcy Prediction: The Case of the Greek Market," Forecasting, MDPI, vol. 2(4), pages 1-21, December.
    11. Philip Sinnadurai & Norashikin Ismail & Noor Marini Haji-Abdullah, 2022. "Prediction of corporate recovery in Malaysia," Review of Quantitative Finance and Accounting, Springer, vol. 59(4), pages 1303-1334, November.
    12. James S. Ang & Wei Mike Chen & Shan Li & Lihong Wang, 2022. "Gaming governance: cosmetic or real corporate governance changes?," Review of Quantitative Finance and Accounting, Springer, vol. 59(1), pages 91-121, July.
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    More about this item

    Keywords

    Corporate financial distress; Bankruptcy prediction; Private firms; Discrete hazard (multi-period logit) model; Financial statements; Greek debt crisis;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies

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