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More than a Dummy: The Probability of Failure, Survival and Acquisition of Private Firms in Financial Distress

Listed author(s):
  • Thomas B. Astebro

    (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique)

  • J. K. Winter

We discuss three methodological issues concerning forecasts of the outcome of financial distress. First, we argue that rather than using a binary model the outcome of financial distress should be modeled using a multinomial specification that distinguishes between failure, survival as going concern, and acquisition. We also argue for a random rather than matched-pair sampling technique to better reflect decision making reality. Finally, we investigate the value of using industry-mean adjusted regressors. We find that the binary bankruptcy model is mis-specified relative to the multinomial model, that the matched sampling technique overstates model accuracy and that industry specific intercepts have better explanatory power than industry-adjusted regressors.

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Paper provided by HAL in its series Post-Print with number hal-00715485.

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Date of creation: 2012
Publication status: Published in European Management Review, Wiley, 2012, 9 (1), pp.NC
Handle: RePEc:hal:journl:hal-00715485
Note: View the original document on HAL open archive server: https://hal-hec.archives-ouvertes.fr/hal-00715485
Contact details of provider: Web page: https://hal.archives-ouvertes.fr/

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