Prediction of company failure: Past, present and promising directions for the future

• Published in: International review of financial analysis 2018-01, Vol.55, p.196-208
• Main Author: Jayasekera, Ranadeva
• Format: Article
• Language: English
• Subjects: Accounting based statistical models; Bankruptcy prediction; Financial distress; Market based models; Value erosion model
• ISSN: 1057-5219; 1873-8079
• DOI: 10.1016/j.irfa.2017.08.009

The quest for a reliable tool that can predict company failure has been pursued with keen interest both by academics and practitioners for a more than a century. This paper presents a survey of the key papers published on bankruptcy prediction from a critical perspective and discusses models published in the academic literature, are frequently cited and considered to have made a significant contribution to the literature on business failure. This study provides an overview of the significant models, conducts a critical discussion of these models highlighting their virtues and drawbacks. The paper concludes with the author outlining the basic concept of a "Value Erosion Model", where ‘value’ is defined as the future potential of a firm and argues that such a model can address some of the significant drawbacks associated with existing models, offering interesting avenues for future research in the development of an academically robust practically applicable bankruptcy prediction model.