Modelling corporate failure: A multinomial nested logit analysis for unordered outcomes

Stewart Jones and David Hensher

The British Accounting Review, 2007, vol. 39, issue 1, 89-107

Abstract: This study evaluates the theoretical and empirical significance of the multinomial nested logit (NL) model as an advanced closed-form model for the explanation and prediction of firm financial distress. Using a four-state failure model based on Australian company samples, we estimate an NL model and test its predictive performance on a holdout sample. Comparison of model fits and out-of-sample forecasts indicate that the unordered NL model statistically outperforms a standard logit model by substantial margins. NL may even be used as an effective practical alternative to more advanced open-form models such as mixed logit in the modelling of firm financial distress.

Keywords: Financial distress prediction; Unordered outcomes; Multinomial nested logit; Standard logit (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (22)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:bracre:v:39:y:2007:i:1:p:89-107

DOI: 10.1016/j.bar.2006.12.003

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