An empirical comparison of bankruptcy models

Charles E. Mossman, Geoffrey G. Bell, L. Mick Swartz, Harry Turtle

Research output: Contribution to journalArticlepeer-review

89 Scopus citations

Abstract

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.

Original languageEnglish (US)
Pages (from-to)35-54
Number of pages20
JournalFinancial Review
Volume33
Issue number2
DOIs
StatePublished - May 1998

Keywords

  • Bankruptcy
  • Financial distress
  • Prediction

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