Article2004

Identification of corporate distress in UK industrials: a conditional probability analysis approach

60 citations0/0 files storedApplied Financial Economics

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Financial Distress and Bankruptcy Prediction Corporate Insolvency and Governance Forecasting Techniques and Applications

Abstract

Multivariate discriminant analysis (MDA) has long been used to classify failing and non-failing firms with high accuracy rates, although a number of methodological flaws are well known. The alternative approach based on conditional probability analysis (CPA) models have been applied to forecast mergers and acquisitions and extended to the prediction of corporate failure. This is used here to distinguish between distressed and non-distressed companies in the UK industrial sector for the period 1985–1994. Results show that the CPA model is both efficient and consistent, has high accuracy levels and avoids the biased sampling problems that have been identified in MDA studies.

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References

1968FINANCIAL RATIOS, DISCRIMINANT ANALYSIS AND THE PREDICTION OF CORPORATE BANKRUPTCY 1958The Cost of Capital, Corporation Finance and the Theory of Investment 1972Conditional logit analysis of qualitative choice behavior 1983Limited-dependent and qualitative variables in econometrics 1980Financial Ratios and the Probabilistic Prediction of Bankruptcy 1963CORPORATE INCOME TAXES AND THE COST OF CAPITAL: A CORRECTION 1966Financial Ratios As Predictors of Failure 1984Methodological Issues Related to the Estimation of Financial Distress Prediction Models

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