Factors Affecting the Probability of Bankruptcy: A Managerial Decision Based Approach
The majority of classification models developed have used a pool of financial ratios combined with statistical variable selection techniques to maximise the accuracy of the classifier being employed. Rather than follow an "ad hoc" variable selection process, this paper seeks to provide an economic basis for the selection of variables for inclusion in bankruptcy models, which are based on accounting information. Variables which occur in bankruptcy probability expressions derived from the solution of an stochastic optimising model for a firm are 'proxied' by variables constructed from financial statement data. The random nature of the life time of a single firm provides the rationale for the use of duration or hazard-based statistical methods in the validation of the derived bankruptcy probability expressions. The Cox (1972) proportional hazards model is used to estimate the coefficients and standard errors that are required for the validation of the derived bankruptcy probability expressions. Results of the validation exercise confirm that the variables included in the empirical hazard formulation behave in a way that is consistent with the model of the firm.
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Volume (Year): 43 (2007)
Issue (Month): 3 ()
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- Maurice Peat, 2001. "Bankruptcy Probability: A Theoretical and Empirical Examination," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 20.
- 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.
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- Scott, James, 1981. "The probability of bankruptcy: A comparison of empirical predictions and theoretical models," Journal of Banking & Finance, Elsevier, vol. 5(3), pages 317-344, September.
- Grice, John Stephen & Ingram, Robert W., 2001. "Tests of the generalizability of Altman's bankruptcy prediction model," Journal of Business Research, Elsevier, vol. 54(1), pages 53-61, October.
- Pinches, George E & Mingo, Kent A & Caruthers, J Kent, 1973. "The Stability of Financial Patterns in Industrial Organizations," Journal of Finance, American Finance Association, vol. 28(2), pages 389-96, May.
- 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.
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