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The influence of the business cycle on bankruptcy probability

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    Abstract

    I combine two fields of research on default prediction by empirically testing a bankruptcy prediction function where unlisted firms are evaluated on the basis of both their financial statement analysis and the macroeconomic environment. This combination is found to improve the default prediction compared to financial statements alone. The GDP-gap, a production index and the money supply M1 in combination with some financial health indicators for individual firms are found to be significant predictors on default for Norwegian firms during both a recovery and expansion in the 1990’s.

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    File URL: http://www.ssb.no/a/publikasjoner/pdf/DP/dp466.pdf
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    Bibliographic Info

    Paper provided by Research Department of Statistics Norway in its series Discussion Papers with number 466.

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    Date of creation: Aug 2006
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    Handle: RePEc:ssb:dispap:466

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    Keywords: bankruptcy prediction; macroeconomic environment; financial ratios; logit model;

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    1. Hodrick, Robert J & Prescott, Edward C, 1997. "Postwar U.S. Business Cycles: An Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 1-16, February.
    2. Levy, Amnon & Bar-niv, Ran, 1987. "Macroeconomic aspects of firm bankruptcy analysis," Journal of Macroeconomics, Elsevier, vol. 9(3), pages 407-415.
    3. Fama, Eugene F., 1986. "Term premiums and default premiums in money markets," Journal of Financial Economics, Elsevier, vol. 17(1), pages 175-196, September.
    4. Crouhy, Michel & Galai, Dan & Mark, Robert, 2000. "A comparative analysis of current credit risk models," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 59-117, January.
    5. Victor Zarnowitz & Lionel J. Lerner, 1961. "Cyclical Changes in Business Failures and Corporate Profits," NBER Chapters, in: Business Cycle Indicators, Volume 1, pages 350-385 National Bureau of Economic Research, Inc.
    6. Bystrom, Hans & Worasinchai, Lugkana & Chongsithipol, Srisuda, 2005. "Default risk, systematic risk and Thai firms before, during and after the Asian crisis," Research in International Business and Finance, Elsevier, vol. 19(1), pages 95-110, March.
    7. Westgaard, Sjur & van der Wijst, Nico, 2001. "Default probabilities in a corporate bank portfolio: A logistic model approach," European Journal of Operational Research, Elsevier, vol. 135(2), pages 338-349, December.
    8. Melicher, Ronald W. & Hearth, Douglas, 1988. "A time series analysis of aggregate business failure activity and credit conditions," Journal of Economics and Business, Elsevier, vol. 40(4), pages 319-333, November.
    9. 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.
    10. Victor Zarnowitz, 1997. "Business Cycles Observed and Assessed: Why and How They Matter," NBER Working Papers 6230, National Bureau of Economic Research, Inc.
    11. 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.
    12. Carling, Kenneth & Jacobson, Tor & Linde, Jesper & Roszbach, Kasper, 2007. "Corporate credit risk modeling and the macroeconomy," Journal of Banking & Finance, Elsevier, vol. 31(3), pages 845-868, March.
    13. Andrew Benito & Francisco Javier Delgado & Jorge Martínez Pagés, 2004. "A synthetic indicator of financial pressure for spanish firms," Banco de Espa�a Working Papers 0411, Banco de Espa�a.
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    Cited by:
    1. Van Laere, Elisabeth & Baesens, Bart, 2010. "The development of a simple and intuitive rating system under Solvency II," Insurance: Mathematics and Economics, Elsevier, vol. 46(3), pages 500-510, June.

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