Taking the Twists into Account: Predicting Firm Bankruptcy Risk with Splines of Financial Ratios

Paolo Giordani (), Tor Jacobson, Erik von Schedvin and Mattias Villani

Journal of Financial and Quantitative Analysis, 2014, vol. 49, issue 4, 1071-1099

Abstract: We demonstrate improvements in predictive power when introducing spline functions to take account of highly nonlinear relationships between firm failure and leverage, earnings, and liquidity in a logistic bankruptcy model. Our results show that modeling excessive nonlinearities yields substantially improved bankruptcy predictions, on the order of 70%–90%, compared with a standard logistic model. The spline model provides several important and surprising insights into nonmonotonic bankruptcy relationships. We find that low-leveraged as well as highly profitable firms are riskier than those given by a standard model, possibly a manifestation of credit rationing and excess cash-flow volatility.

Date: 2014
References: Add references at CitEc
Citations: View citations in EconPapers (14)

Downloads: (external link)
https://www.cambridge.org/core/product/identifier/ ... type/journal_article link to article abstract page (text/html)

Related works:
Working Paper: Taking the Twists into Account: Predicting Firm Bankruptcy Risk with Splines of Financial Ratios (2011)
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:cup:jfinqa:v:49:y:2014:i:04:p:1071-1099_00

Access Statistics for this article

More articles in Journal of Financial and Quantitative Analysis from Cambridge University Press Cambridge University Press, UPH, Shaftesbury Road, Cambridge CB2 8BS UK.
Bibliographic data for series maintained by Kirk Stebbing ().