Bankruptcy prediction Research Paper Example | Topics and Well Written Essays - 3250 words

Bankruptcy prediction - Research Paper Example e year correctly classify the dozen or so listed industrial companies which will fail, but will incorrectly identify about 120 of the remaining 600 as likely to go bankrupt. In fact, analysts who might use the models t help them produce their credit ratings are likely to try them out before relying on them and making them self-fulfulling. It therefore seems unlikely that a misclassification error rate of 1 in 5 for surviving listed companies would be acceptable, even allowing for the substantially greater costs of incorrectly identifying a bankrupt company as sound when compared to those of misclassifying a surviving company as a prima facie failure." Richard Morris This paper examines whether accounting based measures effectively capture publicly available information about a firm's probability of bankruptcy. Section 2 Section 3 describes model and research methodology which includes details about the sample selection procedures, variable estimation and descriptive statistics are reported in section 4. Section 5 present and discuss the results, while Section 6 summarizes and concludes the paper. Also include a list of variables in Appendix A. 1. Literature Review 1.1 Accounting ratios Professor Edward Altman invented a model called Z-Scores by applying multivariate formula to forecast bankruptcy probabilities of the firms over 30 years from 1965-1999. In 2000, he extended his research throughout the year 1999 by improving accuracies of 96% one period prior to bankruptcy to 70% five annual reporting periods prior. Ohlson (1980) also developed a bankruptcy prediction model with logit analysis using a number of bankruptcy firms that were traded on NYSE and AMSE during the 1970s. Begley Joy et al (1997) critised the estimation models of Altman (1968) and...In fact, analysts who might use the models t help them produce their credit ratings are likely to try them out before relying on them and making them self-fulfulling. It therefore seems unlikely that a misclassification error rate of 1 in 5 for surviving listed companies would be acceptable, even allowing for the substantially greater costs of incorrectly identifying a bankrupt company as sound when compared to tho se of misclassifying a surviving company as a prima facie failure." Richard Morris Professor Edward Altman invented a model called Z-Scores by applying multivariate formula to forecast bankruptcy probabilities of the firms over 30 years from 1965-1999. In 2000, he extended his research throughout the year 1999 by improving accuracies of 96% one period prior to bankruptcy to 70% five annual reporting periods prior. Ohlson (1980) also developed a bankruptcy prediction model with logit analysis using a number of bankruptcy firms that were traded on NYSE and AMSE during the 1970s. Begley Joy et al (1997) critised the estimation models of Altman (1968) and Ohlson (1980) were not performed well by using 1980's data.