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An Error Component Logit Analysis of Corporate Bankruptcy and Insolvency Risk in Australia

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  • DAVID A. HENSHER
  • STEWART JONES
  • WILLIAM H. GREENE

Abstract

This paper introduces a four‐state failure model to depict a wider range of distress scenarios that public companies typically face in the real world. We use a multinomial error component logit model to analyse firm failure, a major advance on the modelling techniques used in previous research. The error component logit model, being an extension of the more familiar mixed logit model, relaxes several questionable statistical assumptions associated with standard models. Using a sample of Australian firms we provide an interpretative illustration of the error component logit model and contrast its behavioural performance with the standard logit model widely used in previous research.

Suggested Citation

  • David A. Hensher & Stewart Jones & William H. Greene, 2007. "An Error Component Logit Analysis of Corporate Bankruptcy and Insolvency Risk in Australia," The Economic Record, The Economic Society of Australia, vol. 83(260), pages 86-103, March.
  • Handle: RePEc:bla:ecorec:v:83:y:2007:i:260:p:86-103
    DOI: 10.1111/j.1475-4932.2007.00378.x
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    7. Stewart Jones, 2017. "Corporate bankruptcy prediction: a high dimensional analysis," Review of Accounting Studies, Springer, vol. 22(3), pages 1366-1422, September.
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    19. Dawen Yan & Guotai Chi & Kin Keung Lai, 2020. "Financial Distress Prediction and Feature Selection in Multiple Periods by Lassoing Unconstrained Distributed Lag Non-linear Models," Mathematics, MDPI, vol. 8(8), pages 1-27, August.
    20. Huong Dang, 2014. "A Competing Risks Dynamic Hazard Approach to Investigate the Insolvency Outcomes of Property-Casualty Insurers," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 39(1), pages 42-76, January.
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