IDEAS home Printed from https://ideas.repec.org/a/eee/jbrese/v61y2008i9p995-1003.html
   My bibliography  Save this article

Estimating financial distress likelihood

Author

Listed:
  • Pindado, Julio
  • Rodrigues, Luis
  • de la Torre, Chabela

Abstract

This study develops an ex-ante model for estimating financial distress likelihood (FDL), and contributes to the literature by presenting a financially-based definition of distress that is independent of its legal consequences, a theoretically supported model for the FDL, and an appropriate methodology that uses panel data to eliminate the unobservable heterogeneity. The model is then estimated cross-sectionally to obtain an indicator of the likelihood of financial distress that incorporates the specificity of each company. In doing so, this study provides a well-specified model that is stable in terms of magnitude, sign and significance of the coefficients and, more importantly, that yields a measure of the FDL that is more robust to time and the international context than the estimates of FDL that are based on seminal models. This measure could be appropriate for use in future research that deals with FDL, such as capital structure and the prevention of financial distress.

Suggested Citation

  • Pindado, Julio & Rodrigues, Luis & de la Torre, Chabela, 2008. "Estimating financial distress likelihood," Journal of Business Research, Elsevier, vol. 61(9), pages 995-1003, September.
  • Handle: RePEc:eee:jbrese:v:61:y:2008:i:9:p:995-1003
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0148-2963(07)00328-1
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Sanz, Luis J. & Ayca, Julio, 2006. "Financial distress costs in Latin America: A case study," Journal of Business Research, Elsevier, vol. 59(3), pages 394-395, March.
    2. MacKie-Mason, Jeffrey K, 1990. "Do Taxes Affect Corporate Financing Decisions?," Journal of Finance, American Finance Association, vol. 45(5), pages 1471-1493, December.
    3. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    4. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    5. Grice, John Stephen & Dugan, Michael T, 2001. "The Limitations of Bankruptcy Prediction Models: Some Cautions for the Researcher," Review of Quantitative Finance and Accounting, Springer, vol. 17(2), pages 151-166, September.
    6. Michael C. Jensen, 2010. "Active Investors, LBOs, and the Privatization of Bankruptcy," Journal of Applied Corporate Finance, Morgan Stanley, vol. 22(1), pages 77-85, January.
    7. Arellano, Manuel & Honore, Bo, 2001. "Panel data models: some recent developments," Handbook of Econometrics, in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 5, chapter 53, pages 3229-3296, Elsevier.
    8. Sean Cleary, 1999. "The Relationship between Firm Investment and Financial Status," Journal of Finance, American Finance Association, vol. 54(2), pages 673-692, April.
    9. Paul Asquith & Robert Gertner & David Scharfstein, 1994. "Anatomy of Financial Distress: An Examination of Junk-Bond Issuers," The Quarterly Journal of Economics, Oxford University Press, vol. 109(3), pages 625-658.
    10. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    11. Edward Altman & Gabriele Sabato, 2005. "Effects of the New Basel Capital Accord on Bank Capital Requirements for SMEs," Journal of Financial Services Research, Springer;Western Finance Association, vol. 28(1), pages 15-42, October.
    12. Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 23(4), pages 589-609, September.
    13. Perfect, Steven B. & Wiles, Kenneth W., 1994. "Alternative constructions of Tobin's q: An empirical comparison," Journal of Empirical Finance, Elsevier, vol. 1(3-4), pages 313-341, July.
    14. Ohlson, Ja, 1980. "Financial Ratios And The Probabilistic Prediction Of Bankruptcy," Journal of Accounting Research, Wiley Blackwell, vol. 18(1), pages 109-131.
    15. Zmijewski, Me, 1984. "Methodological Issues Related To The Estimation Of Financial Distress Prediction Models," Journal of Accounting Research, Wiley Blackwell, vol. 22, pages 59-82.
    16. Eisenbeis, Robert A, 1977. "Pitfalls in the Application of Discriminant Analysis in Business, Finance, and Economics," Journal of Finance, American Finance Association, vol. 32(3), pages 875-900, June.
    17. Graham, John R., 1996. "Debt and the marginal tax rate," Journal of Financial Economics, Elsevier, vol. 41(1), pages 41-73, May.
    18. Mark T. Leary & Michael R. Roberts, 2005. "Do Firms Rebalance Their Capital Structures?," Journal of Finance, American Finance Association, vol. 60(6), pages 2575-2619, December.
    19. de Miguel, Alberto & Pindado, Julio, 2001. "Determinants of capital structure: new evidence from Spanish panel data," Journal of Corporate Finance, Elsevier, vol. 7(1), pages 77-99, March.
    20. Julio Pindado & Luis F. Rodrigues, 2004. "Parsimonious Models of Financial Insolvency in Small Companies," Small Business Economics, Springer, vol. 22(1), pages 51-66, February.
    21. Claessens, Stijn & Djankov, Simeon & Klapper, Leora, 2003. "Resolution of corporate distress in East Asia," Journal of Empirical Finance, Elsevier, vol. 10(1-2), pages 199-216, February.
    22. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    23. Denis, David J. & Mihov, Vassil T., 2003. "The choice among bank debt, non-bank private debt, and public debt: evidence from new corporate borrowings," Journal of Financial Economics, Elsevier, vol. 70(1), pages 3-28, October.
    24. Wruck, Karen Hopper, 1990. "Financial distress, reorganization, and organizational efficiency," Journal of Financial Economics, Elsevier, vol. 27(2), pages 419-444, October.
    25. Bhagat, Sanjai & Moyen, Nathalie & Suh, Inchul, 2005. "Investment and internal funds of distressed firms," Journal of Corporate Finance, Elsevier, vol. 11(3), pages 449-472, June.
    26. Joseph, George & Lipka, Roland, 2006. "Distressed firms and the secular deterioration in usefulness of accounting information," Journal of Business Research, Elsevier, vol. 59(2), pages 295-303, February.
    27. Altman, Edward I, 1984. "A Further Empirical Investigation of the Bankruptcy Cost Question," Journal of Finance, American Finance Association, vol. 39(4), pages 1067-1089, September.
    28. 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.
    29. 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.
    30. Ilia D. Dichev, 1998. "Is the Risk of Bankruptcy a Systematic Risk?," Journal of Finance, American Finance Association, vol. 53(3), pages 1131-1147, June.
    31. Palepu, Krishna G., 1986. "Predicting takeover targets : A methodological and empirical analysis," Journal of Accounting and Economics, Elsevier, vol. 8(1), pages 3-35, March.
    32. Nash, Robert C. & Netter, Jeffry M. & Poulsen, Annette B., 2003. "Determinants of contractual relations between shareholders and bondholders: investment opportunities and restrictive covenants," Journal of Corporate Finance, Elsevier, vol. 9(2), pages 201-232, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Xu, Jin, 2012. "Profitability and capital structure: Evidence from import penetration," Journal of Financial Economics, Elsevier, vol. 106(2), pages 427-446.
    2. Bontempi, Maria Elena & Bottazzi, Laura & Golinelli, Roberto, 2020. "A multilevel index of heterogeneous short-term and long-term debt dynamics," Journal of Corporate Finance, Elsevier, vol. 64(C).
    3. B Korcan Ak & Patricia M Dechow & Yuan Sun & Annika Yu Wang, 2013. "The use of financial ratio models to help investors predict and interpret significant corporate events," Australian Journal of Management, Australian School of Business, vol. 38(3), pages 553-598, December.
    4. Marco Botta & Luca Colombo, 2016. "Macroeconomic and Institutional Determinants of Capital Structure Decisions," DISCE - Working Papers del Dipartimento di Economia e Finanza def038, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    5. Andres, Christian & Cumming, Douglas & Karabiber, Timur & Schweizer, Denis, 2014. "Do markets anticipate capital structure decisions? — Feedback effects in equity liquidity," Journal of Corporate Finance, Elsevier, vol. 27(C), pages 133-156.
    6. Alexander Hölzl & Sebastian Lobe, 2016. "Predicting above-median and below-median growth rates," Review of Managerial Science, Springer, vol. 10(1), pages 105-133, January.
    7. Feld, Lars P. & Heckemeyer, Jost H. & Overesch, Michael, 2013. "Capital structure choice and company taxation: A meta-study," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 2850-2866.
    8. Montserrat Manzaneque-Lizano & Esteban Alfaro-Cortés & Alba María Priego de la Cruz, 2019. "Stakeholders and Long-Term Sustainability of SMEs. Who Really Matters in Crisis Contexts, and When," Sustainability, MDPI, Open Access Journal, vol. 11(23), pages 1-27, November.
    9. Hong-Yi Chen & Cheng Few Lee & Tzu Tai, 2019. "The Joint Determinants of Capital Structure and Stock Rate of Return: A LISREL Model Approach," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 22(02), pages 1-51, June.
    10. Leary, Mark T. & Roberts, Michael R., 2010. "The pecking order, debt capacity, and information asymmetry," Journal of Financial Economics, Elsevier, vol. 95(3), pages 332-355, March.
    11. Shoaib Ali & Attiya Yasmin Javid, 2015. "Relationship between Credit Rating, Capital Structure and Earning Management Behaviour: Evidence from Pakistani Listed Firms," PIDE-Working Papers 2015:121, Pakistan Institute of Development Economics.
    12. Bartholdy, Jan & Mateus, Cesário, 2006. "Debt and Taxes: Evidence from bank-financed unlisted firms," Finance Research Group Working Papers F-2006-02, University of Aarhus, Aarhus School of Business, Department of Business Studies.
    13. Alexander Hölzl & Sebastian Lobe, 2016. "Predicting above-median and below-median growth rates," Review of Managerial Science, Springer, vol. 10(1), pages 105-133, January.
    14. Nadine Levratto & Luc Tessier & Messaoud Zouikri, 2011. "Small, alone and poor: a merciless portrait of insolvent French firms, 2007-2010," EconomiX Working Papers 2011-36, University of Paris Nanterre, EconomiX.
    15. Shleifer, Andrei & Vishny, Robert W, 1997. "A Survey of Corporate Governance," Journal of Finance, American Finance Association, vol. 52(2), pages 737-783, June.
    16. Bae, Kee-Hong & Kang, Jun-Koo & Wang, Jin, 2011. "Employee treatment and firm leverage: A test of the stakeholder theory of capital structure," Journal of Financial Economics, Elsevier, vol. 100(1), pages 130-153, April.
    17. Bartholdy, Jan & Mateus, Cesário, 2011. "Debt and taxes for private firms," International Review of Financial Analysis, Elsevier, vol. 20(3), pages 177-189, June.
    18. Lyandres, Evgeny, 2007. "Costly external financing, investment timing, and investment-cash flow sensitivity," Journal of Corporate Finance, Elsevier, vol. 13(5), pages 959-980, December.
    19. Bhanu Pratap Singh & Alok Kumar Mishra, 2016. "Re-estimation and comparisons of alternative accounting based bankruptcy prediction models for Indian companies," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 2(1), pages 1-28, December.
    20. Jayasekera, Ranadeva, 2018. "Prediction of company failure: Past, present and promising directions for the future," International Review of Financial Analysis, Elsevier, vol. 55(C), pages 196-208.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jbrese:v:61:y:2008:i:9:p:995-1003. 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: . General contact details of provider: http://www.elsevier.com/locate/jbusres .

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jbusres .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.