 Predicting corporate bankruptcy: What matters?Leon Li and Robert Faff International Review of Economics & Finance, 2019, vol. 62, issue C, 1-19 Abstract: or market-based information should be employed to predict corporate default is a long-standing debate in finance research. Incorporating a regime-switching mechanism, we establish a hybrid bankruptcy prediction model with non-uniform loadings in both accounting- and market-based approaches to reexamine the issue. We find the following. Creditors should increase the loading on market-based information when large and liquid corporations are considered. Conversely, for companies with incremental information involved in accounting reporting proxied by discretionary accruals, banks could emphasize accounting ratio-based variables more than they are already emphasized. Since managerial discretion in accounting numbers could serve as a tool to bring undisclosed information about the firm to the public, the weight on accounting-based information could be increased for firms with high information asymmetry. In addition, the loading on market-based (accounting-based) information should be increased (decreased) during periods of financial crisis, defined by negative gross domestic product growth. Keywords: Regime-switching system; Z-score; Distance to default; Bankruptcy (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:62:y:2019:i:c:p:1-19 DOI: 10.1016/j.iref.2019.02.016 Access Statistics for this article International Review of Economics & Finance is currently edited by H. Beladi and C. Chen More articles in International Review of Economics & Finance from Elsevier |
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