Re-estimation of company insolvency prediction models: Survey on Italian manufacturing companies

Abstract

The global research stems from the relevance of the global economic crisis. The research has several objectives: 1) to test the degree of effectiveness of the insolvency prediction models, most widely used in the literature, including recent works (Jackson and Wood, 2013), with reference to Italian manufacturing companies; 2) to modify the insolvency prediction models selected with the aim of identifying a company insolvency “alert model” which can be used by the various stakeholders; 3) to compare the effectiveness of the re-estimated models vis-à-vis the original ones. The following models were used, selected according to their diffusion and the statistical technique used: 1) Discriminant analysis: - Altman (1983), - Taffler (1983); 2) Logit Analysis: - Ohlson (1980). The study was carried out on a population of Italian companies (27,982 non-failed and 478 failed) with financial statements available for the years 2007-2012. It emerged that, the overall error of the original models, using the original cut-off points, is significant. The error is reduced for cut-off points different from those identified by the original authors. Furthermore, the new re-estimated models have an improved or identical effectiveness vis-à-vis the original models. In particular, the Ohlson re-estimated model is the one that improves most compared to the original model; however, the effectiveness of the Ohlson re-estimated model is lower than the Altman re-estimated model.

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