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Predicting corporate financial distress: Reflections on choice-based sample bias

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  • Harlan Platt
  • Marjorie Platt

Abstract

Financial distress precedes bankruptcy. Most financial distress models actually rely on bankruptcy data, which is easier to obtain. We obtained a dataset of financially distressed but not yet bankrupt companies supplying a major auto manufacturer. An early warning model successfully discriminated between these distressed companies and a second group of similar but healthy companies. Previous researchers argue the matched-sample design, on which some earlier models were built, causes bias. To test for bias, the dataset was partitioned into smaller samples that approach equal groupings. We statistically confirm the presence of a bias and describe its impact on estimated classification rates. Copyright Springer 2002

Suggested Citation

  • Harlan Platt & Marjorie Platt, 2002. "Predicting corporate financial distress: Reflections on choice-based sample bias," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 26(2), pages 184-199, June.
    • Handle: RePEc:spr:jecfin:v:26:y:2002:i:2:p:184-199
    DOI: 10.1007/BF02755985
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    References listed on IDEAS

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