A Comparison of Corporate Bankruptcy Models in Australia: The Merton vs. Accounting-based Models
Actuaries have long employed logistic type regression models in their analysis of renewal rates for property and casualty insurance products. This paper introduces an application of such methodology to the prediction of corporate bankruptcy. This is an example of a widerfield area of endeavor where actuaries have the potential to add real value. The results presented in the paper have implications for levels of risk-based capital to be held by insurers and other financial organizations. This paper examines how effectively the default likelihood indicator (DLI) estimated from the Merton model can predict corporate bankruptcy in Australia during 1990-2003. In addition, the performance of the Merton model and the three most popular bankruptcy models, i.e., Altman (1968), Zmijewski (1984), and Shumway (2001) are also compared. Our findings suggest that the Merton model is the most informative model in explaining corporate bankruptcy, followed by the Shumway model. Among accounting and market-based variables in bankruptcy models, only two variables, namely the ratio of total liabilities to total assets (TL/TA) and the idiosyncratic standard deviation of stock returns are most significant in predicting corporate bankruptcy. Finally, the results from our comparative study of bankruptcy prediction models suggest developing a multivariable logistic regression model which includes both financial ratios and Mertons default likelihood indicator as predictors. We assess the predictive ability of this model by comparing 95% confidence intervals for the predicted probability of default for firms that default and firms that are not observed to default.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 3 (2009)
Issue (Month): 2 (April)
|Contact details of provider:|| Web page: https://www.degruyter.com|
|Order Information:||Web: https://www.degruyter.com/view/j/apjri|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kaplan, Robert S & Urwitz, Gabriel, 1979. "Statistical Models of Bond Ratings: A Methodological Inquiry," The Journal of Business, University of Chicago Press, vol. 52(2), pages 231-261, April.
- Lincoln, Mervyn, 1984. "An empirical study of the usefulness of accounting ratios to describe levels of insolvency risk," Journal of Banking & Finance, Elsevier, vol. 8(2), pages 321-340, June.
- Merton, Robert C., 1977. "An analytic derivation of the cost of deposit insurance and loan guarantees An application of modern option pricing theory," Journal of Banking & Finance, Elsevier, vol. 1(1), pages 3-11, June.
- repec:bla:joares:v:4:y:1966:i::p:71-111 is not listed on IDEAS
- Bongini, Paola & Laeven, Luc & Majnoni, Giovanni, 2002. "How good is the market at assessing bank fragility? A horse race between different indicators," Journal of Banking & Finance, Elsevier, vol. 26(5), pages 1011-1028, May.
- repec:bla:joares:v:22:y:1984:i::p:59-82 is not listed on IDEAS
When requesting a correction, please mention this item's handle: RePEc:bpj:apjrin:v:3:y:2009:i:2:n:7. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Peter Golla)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.