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Firm dynamics and bankruptcy processes: A new theoretical model

Şaban Çelik, Bora Aktan and Bruce Burton

Journal of Forecasting, 2022, vol. 41, issue 3, 567-591

Abstract: This paper introduces a theoretical model that relates firm dynamics to bankruptcy processes on both univariate and multivariate bases. The distinctiveness of the study lies in the estimation of default using a framework where firm dynamics are linked to the bankruptcy process itself. The structure builds on theoretical relations among the constructs viewed from a perspective sufficiently wide to demonstrate value addition and dilution. The univariate‐based estimation results indicate that the variables determined via the model successfully differentiate distressed firms from non‐distressed and other firms, although the evidence from the multivariate analysis facilitate a 90%+ correct distressed/non‐distressed classification rate for both 1‐ and 2‐year periods. The findings provide a road map for selecting the most appropriate default prediction variables and identifying the role of each in the prediction process. The prediction accuracy of the model does not depend solely upon statistical techniques but also reflects each variable's theoretical underpinning. The model is shown to be useful for firm rating in general and credit approval decisions in particular.

Date: 2022
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Handle: RePEc:wly:jforec:v:41:y:2022:i:3:p:567-591