Firm Failure Prediction Models: A Critique and a Review of Recent Developments

Richard L. Constand () and Rassoul Yazdipour
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Richard L. Constand: California State University

Chapter Chapter 10 in Advances in Entrepreneurial Finance, 2011, pp 185-204 from Springer

Abstract: Abstract This chapter first argues that the literature on financial distress and failure prediction has totally ignored the cause of failure – managers and owner-managers as decision makers – and instead has almost exclusively focused on the effect of failure, the financial data. The chapter then provides a review of the current state of the failure prediction literature. Recent studies that focus on small and medium-sized enterprises (SMEs) are covered next. We arrive at the same conclusion that after 35 years of academic inquiry into bankruptcy prediction, and despite all the sophisticated models and methodologies used in studies of the effects of firm failure, there is “no academic consensus as to the most useful method for ­predicting corporate bankruptcy.” At the end, the chapter discusses how psychological ­phenomena and principles, also known as heuristics or mental shortcuts, might be utilized in building more powerful success/failure prediction models.

Keywords: Total Asset; Private Firm; Cognitive Bias; Financial Distress; Public Firm (search for similar items in EconPapers)
Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-1-4419-7527-0_10

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DOI: 10.1007/978-1-4419-7527-0_10

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