Re-estimation and comparisons of alternative accounting based bankruptcy prediction models for Indian companies

Bhanu Singh and Alok Mishra ()

Financial Innovation, 2016, vol. 2, issue 1, 1-28

Abstract: Abstract Background The suitability and performance of the bankruptcy prediction models is an empirical question. The aim of this paper is to develop a bankruptcy prediction model for Indian manufacturing companies on a sample of 208 companies consisting of an equal number of defaulted and non-defaulted firms. Out of 208 companies, 130 are used for estimation sample, and 78 are holdout for model validation. The study reestimates the accounting based models such as Altman EI (Journal of Finance 23: 19189–209, 1968) Z-Score, Ohlson JA (Journal of Accounting Research 18:109–131, 1980) Y-Score and Zmijewski ME (Journal of Accounting Research 22:59–82, 1984) X-Score model. The paper compares original and re-estimated models to explore the sensitivity of these models towards the change in time periods and financial conditions. Methods Multiple Discriminant Analysis (MDA) and Probit techniques are employed in the estimation of Z-Score and X-Score models, whereas Logit technique is employed in the estimation of Y-Score and the newly proposed models. The performance of all the original, re-estimated and new proposed models are assessed by predictive accuracy, significance of parameters, long-range accuracy, secondary sample and Receiver Operating Characteristic (ROC) tests. Results The major findings of the study reveal that the overall predictive accuracy of all the three models improves on estimation and holdout sample when the coefficients are re-estimated. Amongst the contesting models, the new bankruptcy prediction model outperforms other models. Conclusions The industry specific model should be developed with the new combinations of financial ratios to predict bankruptcy of the firms in a particular country. The study further suggests the coefficients of the models are sensitive to time periods and financial condition. Hence, researchers should be cautioned while choosing the models for bankruptcy prediction to recalculate the models by looking at the recent data in order to get higher predictive accuracy.

Keywords: Bankruptcy prediction; Indian manufacturing companies; MDA; Logit; Probit; Unstable coefficient; Predictive accuracy; Receiver operating characteristic; Long range accuracy; G; 33 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

Downloads: (external link)
http://link.springer.com/10.1186/s40854-016-0026-9 Abstract (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:fininn:v:2:y:2016:i:1:d:10.1186_s40854-016-0026-9

Ordering information: This journal article can be ordered from
http://www.springer. ... nomics/journal/40589

DOI: 10.1186/s40854-016-0026-9

Access Statistics for this article

Financial Innovation is currently edited by J. Leon Zhao and Zongyi

More articles in Financial Innovation from Springer, Southwestern University of Finance and Economics
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().