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Indicators of corporate default : an EU based empirical study

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  • Aaro Hazak

    ()

  • Kadri Männasoo

    ()

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    Abstract

    The present paper contributes to the research on the indicators that provide a warning of company failure by employing micro and macro variables within a framework of survival analysis using a sample of 0.4 million companies from the European Union (EU). The sensitivity of the results is checked using two complementary event definitions - bankruptcy and negative equity. Our results imply that the baseline hazard of a default is a U-shaped function of the time the company has survived. High leverage and a low return on assets appear to be strong predictors of failure. Macroeconomic variables give mixed evidence for old and new member states as well as for the two default definitions

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    Bibliographic Info

    Paper provided by Bank of Estonia in its series Bank of Estonia Working Papers with number 2007-10.

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    Date of creation: 04 Sep 2007
    Date of revision: 04 Sep 2007
    Handle: RePEc:eea:boewps:wp2007-10

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    Keywords: corporate default; bankruptcy; survival analysis;

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    1. Balcaen S. & Ooghe H., 2004. "Alternative methodologies in studies on business failure: do they produce better results than the classic statistical methods?," Vlerick Leuven Gent Management School Working Paper Series 2004-16, Vlerick Leuven Gent Management School.
    2. S. Balcaen & H. Ooghe, 2004. "35 years of studies on business failure: an overview of the classical statistical methodologiesand their related problems," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 04/248, Ghent University, Faculty of Economics and Business Administration.
    3. Kahya, Emel & Theodossiou, Panayiotis, 1999. " Predicting Corporate Financial Distress: A Time-Series CUSUM Methodology," Review of Quantitative Finance and Accounting, Springer, vol. 13(4), pages 323-45, December.
    4. Shumway, Tyler, 2001. "Forecasting Bankruptcy More Accurately: A Simple Hazard Model," The Journal of Business, University of Chicago Press, vol. 74(1), pages 101-24, January.
    5. Luoma, M & Laitinen, EK, 1991. "Survival analysis as a tool for company failure prediction," Omega, Elsevier, vol. 19(6), pages 673-678.
    6. Dimitras, A. I. & Zanakis, S. H. & Zopounidis, C., 1996. "A survey of business failures with an emphasis on prediction methods and industrial applications," European Journal of Operational Research, Elsevier, vol. 90(3), pages 487-513, May.
    7. Terry J. Ward & Benjamin P. Foster, 1997. "A Note on Selecting a Response Measure for Financial Distress," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 24(6), pages 869-879.
    8. Altman, Edward I. & Haldeman, Robert G. & Narayanan, P., 1977. "ZETATM analysis A new model to identify bankruptcy risk of corporations," Journal of Banking & Finance, Elsevier, vol. 1(1), pages 29-54, June.
    9. Teija Laitinen & Maria Kankaanpaa, 1999. "Comparative analysis of failure prediction methods: the Finnish case," European Accounting Review, Taylor & Francis Journals, vol. 8(1), pages 67-92.
    10. Frydman, Halina & Altman, Edward I & Kao, Duen-Li, 1985. " Introducing Recursive Partitioning for Financial Classification: The Case of Financial Distress," Journal of Finance, American Finance Association, vol. 40(1), pages 269-91, March.
    11. Crouhy, Michel & Galai, Dan & Mark, Robert, 2001. "Prototype risk rating system," Journal of Banking & Finance, Elsevier, vol. 25(1), pages 47-95, January.
    12. Kadri Männasoo, 2007. "Determinants of firm sustainability in Estonia," Bank of Estonia Working Papers 2007-04, Bank of Estonia, revised 08 Mar 2007.
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