More than a Dummy: The Probability of Failure, Survival and Acquisition of Private Firms in Financial Distress

Thomas Astebro and Joachim Winter ()

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Abstract: We discuss three methodological issues concerning forecasts of the outcome of financial distress. First, we argue that rather than using a binary model the outcome of financial distress should be modeled using a multinomial specification that distinguishes between failure, survival as going concern, and acquisition. We also argue for a random rather than matched-pair sampling technique to better reflect decision making reality. Finally, we investigate the value of using industry-mean adjusted regressors. We find that the binary bankruptcy model is mis-specified relative to the multinomial model, that the matched sampling technique overstates model accuracy and that industry specific intercepts have better explanatory power than industry-adjusted regressors.

Keywords: financial distress; forecasting; multinomial logit (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (13)

Published in European Management Review, 2012, 9 (1), pp.NC

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-00715485

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