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An Error Component Logit Analysis of Corporate Bankruptcy and Insolvency Risk in Australia
Author(s) -
HENSHER DAVID A.,
JONES STEWART,
GREENE WILLIAM H.
Publication year - 2007
Publication title -
economic record
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.365
H-Index - 42
eISSN - 1475-4932
pISSN - 0013-0249
DOI - 10.1111/j.1475-4932.2007.00378.x
Subject(s) - multinomial logistic regression , logit , econometrics , mixed logit , logistic regression , component (thermodynamics) , bankruptcy , sample (material) , bankruptcy prediction , insolvency , actuarial science , economics , statistics , mathematics , finance , physics , chemistry , chromatography , thermodynamics
This paper introduces a four‐state failure model to depict a wider range of distress scenarios that public companies typically face in the real world. We use a multinomial error component logit model to analyse firm failure, a major advance on the modelling techniques used in previous research. The error component logit model, being an extension of the more familiar mixed logit model, relaxes several questionable statistical assumptions associated with standard models. Using a sample of Australian firms we provide an interpretative illustration of the error component logit model and contrast its behavioural performance with the standard logit model widely used in previous research.