Predicting return outcomes to shareholders from companies entering Chapter 11 bankruptcy

Graham H. Partington · Philip Russel · Maxwell J. Stevenson · Violet Torbey

28 citations0/0 files storedManagerial Finance

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Financial Distress and Bankruptcy Prediction Corporate Finance and Governance Corporate Insolvency and Governance

Abstract

Reviews previous research on predicting financial distress and the effects of US Chapter 11 bankruptcy (C11B); and explains how survival analysis and Cox’s (1972) proportional hazards model can be used to estimate the financial outcome for the shareholders of C11B. Reduces a previous data set (Russel et al 1999) of 154 companies entering C11B between 1984 and 1993 to 59 (54 of which gave no value to shareholders) and estimates two models to predict this: one based on firm‐specific covariates only and the other adding market‐wide covariates. Explains the methodology, presents the results and uses receiver operating characteristic curves to compare the predictive accuracy of the two. Finds little difference between the and suggests using the simpler model. Briefly summarizes the variables which are most useful in predicting the value outcomes of C11B for shareholders and recognizes the limitations of the study.

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References

1968FINANCIAL RATIOS, DISCRIMINANT ANALYSIS AND THE PREDICTION OF CORPORATE BANKRUPTCY 1980Financial Ratios and the Probabilistic Prediction of Bankruptcy 1966Financial Ratios As Predictors of Failure 1977ZETATM analysis A new model to identify bankruptcy risk of corporations 1985Introducing Recursive Partitioning for Financial Classification: The Case of Financial Distress 1986An application of the cox proportional hazards model to bank failure 1987A Five-State Financial Distress Prediction Model 1984The Experimental Design of Classification Models: An Application of Recursive Partitioning and Bootstrapping to Commercial Bank Loan Classifications

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