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Challenges in Predicting Financial Distress in Emerging Economies: The Case of Croatia

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  • Ivana Tomas Žiković

Abstract

Using an extensive dataset of over 44,000 firms for a period that includes an economic upswing and a recession, this article examines how time-varying, firm-specific variables and changes in the macroeconomic environment affect the probability of firms’ financial distress. Traditional single-period approaches used to predict financial distress are based on unrealistically restrictive assumptions and cannot dynamically account for changes in financial indicators and macroeconomic conditions. Therefore discrete-time hazard models (using logit and cloglog) are applied; these indicate that the probability of distress is strongly influenced by both firm-specific and macroeconomic variables. Although firm-specific variables play an essential role, the results show that macroeconomic variables are important for understanding the fluctuations in the probability of distress over time. Furthermore, the findings provide evidence that both the legal criteria and a firm’s financial health should be considered when identifying firms in emerging economies that are in distress because existing bankruptcy laws are not applied.

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  • Ivana Tomas Žiković, 2018. "Challenges in Predicting Financial Distress in Emerging Economies: The Case of Croatia," Eastern European Economics, Taylor & Francis Journals, vol. 56(1), pages 1-27, January.
    • Handle: RePEc:mes:eaeuec:v:56:y:2018:i:1:p:1-27
    DOI: 10.1080/00128775.2017.1387059
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    Cited by:

    1. Theodore Metaxas & Athanasios Romanopoulos, 2023. "A Literature Review on the Financial Determinants of Hotel Default," JRFM, MDPI, vol. 16(7), pages 1-19, July.
    2. Elena Gregova & Katarina Valaskova & Peter Adamko & Milos Tumpach & Jaroslav Jaros, 2020. "Predicting Financial Distress of Slovak Enterprises: Comparison of Selected Traditional and Learning Algorithms Methods," Sustainability, MDPI, vol. 12(10), pages 1-17, May.
    3. Lucia Svabova & Lucia Michalkova & Marek Durica & Elvira Nica, 2020. "Business Failure Prediction for Slovak Small and Medium-Sized Companies," Sustainability, MDPI, vol. 12(11), pages 1-14, June.

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