Analyzing Insolvency Prediction Models in the Period Before and After the Financial Crisis: A Case Study on the Example of US Firms

George Giannopoulos, Sophia Ali Sardar, Rebecca Salti and Nicos Sykianakis

International Journal of Finance, Insurance and Risk Management, 2022, vol. 12, issue 3, 23-45

Abstract: Purpose: The study aims to assess the most accurate bankruptcy prediction model for US firms. Design/methodology/approach: Validating the accuracy of bankruptcy prediction models can provide management with a handy tool as it can decrease potential damage, and carry out corrective actions by intervening and preventing insolvency. The impetus of this paper is not to create a new prediction model but to validate the practical application of 3 widely accepted models to determine accuracy in predicting corporate insolvency for; Altman’s, Taffler’s and Ohlson’s models. The Logit regression framework is employed to estimate the 3 aforementioned models. Findings: The results revealed that: i) Taffler’s and Ohlson’s models are the most accurate for correctly predicting failed and non-failed firms with an average predictive ability of 75% and 87%, respectively, ii) Altman’s model had a rather lower predicting ability of 57%, iii) Altman’s model predicts high accuracy for only solvent firms, iv) Taffler’s and Ohlson’s models can subsequently, assist lenders, auditors, executives, investors and corporations to evaluate bankruptcy risk. Practical implications: An early warning system can protect a firm from running into insolvency. Furthermore, a country with healthy economic conditions can attract national and international investors. In view of that, a robust bankruptcy predictor reduces the probability of large number of insolvencies occurring. Originality value: This study found that failed US firms had low liquidity, low profitability and high gearing. Therefore, these three aspects should be measured as the primary concern when examining a US firm’s financial condition.

Keywords: Insolvency Prediction Models; Bankruptcy; US firms. (search for similar items in EconPapers)
JEL-codes: G33 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:ers:ijfirm:v:12:y:2022:i:3:p:23-45

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