An Empirical Investigation of Firm Longevity: A Model of the Ex Ante Predictors of Financial Distress

Howard F Turetsky and Ruth Ann McEwen

Review of Quantitative Finance and Accounting, 2001, vol. 16, issue 4, 323-43

Abstract: Empirical models of a potential failure process that incorporate distress states between the extremes of corporate health and bankruptcy are uncommon. We depict financial distress as a series of financial events that reflect varied stages of corporate adversity. Our intent is to provide information regarding the influence of certain risk dimensions and firm-specific attributes on distressed firm survival over time. Within a theorized distress framework, we utilize the techniques of survival analysis to longitudinally track firms, grouped a priori according to an initial decline in operating cash flows. We find that the event of default has a significant positive association with business failure. Further, we document that the significant accounting covariates tend to change conditional on a firm having progressed through the diverse stages of distress. These findings accentuate the heterogeneous nature of financial distress and potential business failure. Copyright 2001 by Kluwer Academic Publishers

Date: 2001
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