A comparison of alternative bankruptcy prediction models

Wu, Y., Gaunt, C. and Gray, S. (2010) A comparison of alternative bankruptcy prediction models. Journal of Contemporary Accounting & Economics, 6 1: 34-45. doi:10.1016/j.jcae.2010.04.002


Author Wu, Y.
Gaunt, C.
Gray, S.
Title A comparison of alternative bankruptcy prediction models
Journal name Journal of Contemporary Accounting & Economics   Check publisher's open access policy
ISSN 1815-5669
Publication date 2010-06
Sub-type Article (original research)
DOI 10.1016/j.jcae.2010.04.002
Volume 6
Issue 1
Start page 34
End page 45
Total pages 12
Place of publication Oxford, United Kingdom
Publisher Elsevier
Collection year 2011
Language eng
Subject C1
900101 Finance Services
150201 Finance
Abstract Early models of bankruptcy prediction employed financial ratios drawn from pre-bankruptcy financial statements and performed well both in-sample and out-of-sample. Since then there has been an ongoing effort in the literature to develop models with even greater predictive performance. A significant innovation in the literature was the introduction into bankruptcy prediction models of capital market data such as excess stock returns and stock return volatility, along with the application of the Black-Scholes-Merton option pricing model. In this note, we test five key bankruptcy models from the literature using an up-to-date data set and find that they each contain unique information regarding the probability of bankruptcy but that their performance varies over time. We build a new model comprising key variables from each of the five models and add a new variable that proxies for the degree of diversification within the firm. The degree of diversification is shown to be negatively associated with the risk of bankruptcy. This more general model outperforms the existing models in a variety of in-sample and out-of-sample tests. Copyright © 2010 Elsevier Ltd All rights reserved.
Keyword Bankruptcy prediction models
Q-Index Code C1
Q-Index Status Confirmed Code
Institutional Status UQ

Document type: Journal Article
Sub-type: Article (original research)
Collections: Faculty of Business, Economics and Law -- Publications
Official 2011 Collection
UQ Business School Publications
 
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Created: Mon, 12 Apr 2010, 16:34:13 EST by Karen Morgan on behalf of UQ Business School