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The influence of the business cycle on bankruptcy probability

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Abstract

I combine two fields of research on default prediction by empirically testing a bankruptcy prediction function where unlisted firms are evaluated on the basis of both their financial statement analysis and the macroeconomic environment. This combination is found to improve the default prediction compared to financial statements alone. The GDP-gap, a production index and the money supply M1 in combination with some financial health indicators for individual firms are found to be significant predictors on default for Norwegian firms during both a recovery and expansion in the 1990's.

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  • Suzan Hol, 2006. "The influence of the business cycle on bankruptcy probability," Discussion Papers 466, Statistics Norway, Research Department.
  • Handle: RePEc:ssb:dispap:466
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    File URL: http://www.ssb.no/a/publikasjoner/pdf/DP/dp466.pdf
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    1. Fama, Eugene F., 1986. "Term premiums and default premiums in money markets," Journal of Financial Economics, Elsevier, vol. 17(1), pages 175-196, September.
    2. Levy, Amnon & Bar-niv, Ran, 1987. "Macroeconomic aspects of firm bankruptcy analysis," Journal of Macroeconomics, Elsevier, pages 407-415.
    3. Hodrick, Robert J & Prescott, Edward C, 1997. "Postwar U.S. Business Cycles: An Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 1-16, February.
    4. Melicher, Ronald W. & Hearth, Douglas, 1988. "A time series analysis of aggregate business failure activity and credit conditions," Journal of Economics and Business, Elsevier, pages 319-333.
    5. Andrew Benito & Francisco Javier Delgado & Jorge Martínez Pagés, 2004. "A synthetic indicator of financial pressure for spanish firms," Working Papers 0411, Banco de España;Working Papers Homepage.
    6. Bystrom, Hans & Worasinchai, Lugkana & Chongsithipol, Srisuda, 2005. "Default risk, systematic risk and Thai firms before, during and after the Asian crisis," Research in International Business and Finance, Elsevier, pages 95-110.
    7. Carling, Kenneth & Jacobson, Tor & Linde, Jesper & Roszbach, Kasper, 2007. "Corporate credit risk modeling and the macroeconomy," Journal of Banking & Finance, Elsevier, vol. 31(3), pages 845-868, March.
    8. repec:bla:joares:v:4:y:1966:i::p:71-111 is not listed on IDEAS
    9. 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.
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    11. Crouhy, Michel & Galai, Dan & Mark, Robert, 2000. "A comparative analysis of current credit risk models," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 59-117, January.
    12. Victor Zarnowitz, 1997. "Business Cycles Observed and Assessed: Why and How They Matter," NBER Working Papers 6230, National Bureau of Economic Research, Inc.
    13. Victor Zarnowitz & Lionel J. Lerner, 1961. "Cyclical Changes in Business Failures and Corporate Profits," NBER Chapters,in: Business Cycle Indicators, Volume 1, pages 350-385 National Bureau of Economic Research, Inc.
    14. Frydman, Halina & Altman, Edward I & Kao, Duen-Li, 1985. " Introducing Recursive Partitioning for Financial Classification: The Case of Financial Distress," Journal of Finance, American Finance Association, vol. 40(1), pages 269-291, March.
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    Cited by:

    1. Van Laere, Elisabeth & Baesens, Bart, 2010. "The development of a simple and intuitive rating system under Solvency II," Insurance: Mathematics and Economics, Elsevier, vol. 46(3), pages 500-510, June.

    More about this item

    Keywords

    bankruptcy prediction; macroeconomic environment; financial ratios; logit model;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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