Forecasting Bankruptcy More Accurately: A Simple Hazard Model

I argue that hazard models are more appropriate than single‐period models for forecasting bankruptcy. Single‐period models are inconsistent, while hazard models produce consistent estimates. I describe a simple technique for estimating a discrete‐time hazard model. I find that about half of the acco...

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Bibliographic Details
Published in:The Journal of business (Chicago, Ill.) Ill.), 2001-01, Vol.74 (1), p.101-124
Main Author: Shumway, Tyler
Format: Article
Language:English
Subjects:
Bankruptcy
Business structures
Coefficients
Financial performance
Financial risk
Forecasting models
Health hazards
Modeling
Probability forecasts
Static modeling
Statistical forecasts
Studies
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Summary:I argue that hazard models are more appropriate than single‐period models for forecasting bankruptcy. Single‐period models are inconsistent, while hazard models produce consistent estimates. I describe a simple technique for estimating a discrete‐time hazard model. I find that about half of the accounting ratios that have been used in previous models are not statistically significant. Moreover, market size, past stock returns, and idiosyncratic returns variability are all strongly related to bankruptcy. I propose a model that uses both accounting ratios and market‐driven variables to produce out‐of‐sample forecasts that are more accurate than those of alternative models.
ISSN:0021-9398
1537-5374
DOI:10.1086/209665