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Bankruptcy in the pulp and paper industry: market’s reaction and prediction

Chun-Yu Ho (), Pat McCarthy, Yi Yang and Xuan Ye

Empirical Economics, 2013, vol. 45, issue 3, 1205-1232

Abstract: This paper examines North American pulp and paper company bankruptcies that occurred between 1990 and 2009. We demonstrate that shareholders suffer substantial losses (37 %) during the month a bankruptcy occurs. Encouragingly, we show that financial ratios are useful in predicting firm failure and that failed firms are less profitable, more liquidity constrained and higher in debt leverage. Using a binary logit model in the spirit of Ohlson (J Acc Res, 19, 109–131, 1980 ), we predict financial distress for pulp and paper firms 1 to 2 years ahead of the bankruptcy. We also adapt and re-estimate the empirical model on a sample of pulp and paper firms and perform in-sample and out-of-sample forecasts. For the out-of-sample analysis, our re-estimated Ohlson models correctly predict 93 % of bankruptcy and non-bankruptcy outcomes. Copyright Springer-Verlag Berlin Heidelberg 2013

Keywords: Forest Products; Pulp and Paper; Industry studies; Bankruptcy; Corporate finance; G33; L67; L73; Q23 (search for similar items in EconPapers)
Date: 2013
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DOI: 10.1007/s00181-012-0661-6

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