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The influence of the business cycle on bankruptcy probability

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    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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    File URL: http://www.ssb.no/a/publikasjoner/pdf/DP/dp466.pdf
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    Paper provided by Statistics Norway, Research Department in its series Discussion Papers with number 466.

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    Date of creation: Aug 2006
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    Handle: RePEc:ssb:dispap:466
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    1. Victor Zarnowitz, 1997. "Business Cycles Observed and Assessed: Why and How They Matter," NBER Working Papers 6230, National Bureau of Economic Research, Inc.
    2. Robert J. Hodrick & Edward Prescott, 1981. "Post-War U.S. Business Cycles: An Empirical Investigation," Discussion Papers 451, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    3. 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.
    4. 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.
    5. Andrew Benito & Francisco Javier Delgado & Jorge Martínez Pagés, 2004. "A synthetic indicator of financial pressure for spanish firms," Banco de Espa�a Working Papers 0411, Banco de Espa�a.
    6. 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.
    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. Levy, Amnon & Bar-niv, Ran, 1987. "Macroeconomic aspects of firm bankruptcy analysis," Journal of Macroeconomics, Elsevier, vol. 9(3), pages 407-415.
    9. Byström , Hans & Worasinchai , Lugkana & Chongsithipol , Srisuda, 2004. "Default Risk, Systematic Risk and Thai Firms Before, During and After the Asian Crisis," Working Papers 2005:5, Lund University, Department of Economics.
    10. Melicher, Ronald W. & Hearth, Douglas, 1988. "A time series analysis of aggregate business failure activity and credit conditions," Journal of Economics and Business, Elsevier, vol. 40(4), pages 319-333, November.
    11. Fama, Eugene F., 1986. "Term premiums and default premiums in money markets," Journal of Financial Economics, Elsevier, vol. 17(1), pages 175-196, September.
    12. Westgaard, Sjur & van der Wijst, Nico, 2001. "Default probabilities in a corporate bank portfolio: A logistic model approach," European Journal of Operational Research, Elsevier, vol. 135(2), pages 338-349, December.
    13. 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 269-91, March.
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