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An empirical comparison of bankruptcy models
Author(s) -
Mossman Charles E.,
Bell Geoffrey G.,
Swartz L. Mick,
Turtle Harry
Publication year - 1998
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.1998.tb01367.x
Subject(s) - bankruptcy , explanatory power , cash flow , economics , econometrics , actuarial science , stock (firearms) , financial statement , finance , accounting , mechanical engineering , audit , epistemology , engineering , philosophy
Four types of bankruptcy prediction models based on financial statement ratios, cash flows, stock returns, and return standard deviations are compared. Based on a sample of bankruptcies from 1980 to 1991, results indicate that no existing model of bankruptcy adequately captures the data. During the last fiscal year preceding bankruptcy, none of the individual models may be excluded without a loss in explanatory power. If considered in isolation, the cash flow model discriminates most consistently two to three years before bankruptcy. By comparison, the ratio model is the best single model during the year immediately preceding bankruptcy. Quasi‐jack‐knifing procedures suggest that none of the models can reliably predict bankruptcy more than two years in advance.