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

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.
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Journal articles
European Management Review, Wiley, 2012, 9 (1), pp.NC


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Submitted on : Saturday, July 7, 2012 - 7:42:16 PM
Last modification on : Tuesday, December 18, 2012 - 1:33:56 PM

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Thomas B. Astebro, J. K. Winter. More than a Dummy: The Probability of Failure, Survival and Acquisition of Private Firms in Financial Distress. European Management Review, Wiley, 2012, 9 (1), pp.NC. <hal-00715485>

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