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

Author

Listed:
  • 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

Abstract

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.

Suggested Citation

  • Thomas B. Astebro & J. K. Winter, 2012. "More than a Dummy: The Probability of Failure, Survival and Acquisition of Private Firms in Financial Distress," Post-Print hal-00715485, HAL.
  • Handle: RePEc:hal:journl:hal-00715485
    Note: View the original document on HAL open archive server: https://hal-hec.archives-ouvertes.fr/hal-00715485
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    1. repec:kap:sbusec:v:50:y:2018:i:3:d:10.1007_s11187-017-9907-1 is not listed on IDEAS
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