On the prediction of financial distress in developed and emerging markets: Does the choice of accounting and market information matter? A comparison of UK and Indian Firms

Evangelos Charalambakis and Ian Garrett ()
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Ian Garrett: University of Manchester

Review of Quantitative Finance and Accounting, 2016, vol. 47, issue 1, No 1, 28 pages

Abstract: Abstract We assess the contribution of accounting and market-driven information to the prediction of bankruptcy for UK and Indian firms to investigate whether the variables that predict financial distress well for US firms predict financial distress in another developed market and in an emerging market. For the UK we find a hazard model that combines book leverage and three equity market-based variables describes best the probability of corporate financial distress in UK and outperforms several competing models that include Z-score or its accounting ratio components, the expected default frequency (EDF), a model that combines Z-score and EDF and a model that uses three equity market predictors. However, we find that this model does not perform well in India as market information fails to predict bankruptcy. A model with two accounting ratios best estimates the probability of corporate financial distress in India. In-sample and out-of-sample forecasts confirm our core findings for both UK and Indian firms.

Keywords: Financial distress; Hazard model; Z-score; Expected default frequency; Accounting information; Market-based information; UK firms; Indian firms (search for similar items in EconPapers)
JEL-codes: C52 G13 G33 M41 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (5)

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DOI: 10.1007/s11156-014-0492-y

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