This paper assesses the classification performance of the Z‐Score model in predicting bankruptcy and other types of firm distress, with the goal of examining the model's usefulness for all parties, ...especially banks that operate internationally and need to assess the failure risk of firms. We analyze the performance of the Z‐Score model for firms from 31 European and three non‐European countries using different modifications of the original model. This study is the first to offer such a comprehensive international analysis. Except for the United States and China, the firms in the sample are primarily private, and include non‐financial companies across all industrial sectors. We use the original Z′′‐Score model developed by Altman, Corporate Financial Distress: A Complete Guide to Predicting, Avoiding, and Dealing with Bankruptcy (1983) for private and public manufacturing and non‐manufacturing firms. While there is some evidence that Z‐Score models of bankruptcy prediction have been outperformed by competing market‐based or hazard models, in other studies, Z‐Score models perform very well. Without a comprehensive international comparison, however, the results of competing models are difficult to generalize. This study offers evidence that the general Z‐Score model works reasonably well for most countries (the prediction accuracy is approximately 0.75) and classification accuracy can be improved further (above 0.90) by using country‐specific estimation that incorporates additional variables.
The objective is to investigate the influence of Hofstede’s original cultural dimensions on financial distress prediction. Empirical data consist of 1,255,768 non-failed and 22,594 failed yearly firm ...observations from 26 European countries. First, an overall six variable logistic regression model is estimated to predict financial distress in an international context. Second, logistic regression models including moderating (interaction) effects with each financial predictor variable are separately estimated for each cultural dimension. Empirical findings show that Hofstede’s dimensions significantly moderate the effects of many financial predictors in failure prediction. However, equity ratio (solvency) and return on assets ratio (profitability) play central roles in prediction models irrespective of moderating effects. Therefore, solvency and profitability are useful predictors of financial distress in international modeling. Due to the dominant role of the equity ratio across cultures, the contributions of moderating effects and further variables on the overall performance of prediction models are not strong.
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A Race for Long Horizon Bankruptcy Prediction Altman, Edward I.; Iwanicz-Drozdowska, Małgorzata; Laitinen, Erkki K. ...
Applied economics,
08/2020, Volume:
52, Issue:
37
Journal Article
Peer reviewed
Open access
This study compares the accuracy and efficiency of five different estimation methods for predicting financial distress of small and medium-sized enterprises. We apply different methods for a large ...set of financial and non-financial variables, using filter and wrapper selection, to predict bankruptcy up to 10 years before the event in an open, European economy. Our findings show that logistic regression and neural networks are superior to other approaches. We document how the cost-return ratio considerably affects the location of optimal cut-off points and attainable profit in credit decisions. Once a loan provider selects a particular prediction model, an effort should be made to find the optimal cut-off score to maximize the efficiency of the technique. Indeed, this often involves determining several cut-off levels where the portfolio of products and services exhibits different cost-return characteristics.
Purpose
The purpose of this paper is to find out which different failure processes exist among the young manufacturing micro firms, and whether the representation of those processes differs first, in ...European countries, and second, among exporting and non-exporting firms.
Design/methodology/approach
The study is based on financial data of 1,216 manufacturing micro firms from European countries. Failure processes have been detected with a two stage-method: by extracting latent dimensions from financial variables with factor analysis, and then, by clustering the established factor scores.
Findings
With firms’ age, the number of different failure processes reduces from four to two. Strong evidence was found about the dominance of different failure processes in different countries for most firm age groups. Failure processes are not strongly associated with (non-)exporting.
Originality/value
This paper is the first one determining young manufacturing micro firms’ failure processes and comparing the representation of those processes in different firm subsets, either based on their country of origin or (non-)exporting behavior. Moreover, previous studies have not encompassed specific sectors, young or very small firms.
This study focuses on the pre-failure growth in total assets, debt and sales of bankrupted manufacturing firms. Based on a sample of 128 Estonian firms, it is shown that two distinct growth patterns ...can be outlined. When the first pattern shows a gradual decline, then the other characterizes a more eclectic growth behavior. Several classical financial ratios have significantly different values through the established two patterns. Managers’ characteristics do not vary among the established patterns.
It is widely accepted that annual income numbers of firms can be characterized, at least on average, by a submartingale process. Because the samples of previous studies have typically contained only ...large listed firms, there exists a large firm bias in accumulated evidence. In the study, the scope is widened by analyzing the time series properties of listed, smaller privately held and failing Finnish firms using several tests. The evidence challenges the commonly accepted view on pure submartingale behavior of annual net income figures.
Cost of Equity Capital Redefined Suvas, Arto
Quarterly journal of business and economics,
04/1992, Volume:
31, Issue:
2
Journal Article
The Modigliani-Miller (MM) theory of corporate finance has been subject to considerable debate and interest for over 30 years. Today it is the dominant theory in the field. This paper highlights an ...intuitively unappealing implication of the MM model that has remained unnoticed or at least has not received due attention. An alternative definition of the cost of equity is presented that does not have this drawback.
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