The Impact of Equity Misvaluation on Predictive Accuracy of Bankruptcy Models
George E. Batta
Claremont McKenna College - Robert Day School of Economics and Finance
Northwestern University - Kellogg School of Management
Journal of Fixed Income, Vol. 24, No. 2, 2014
This paper examines the impact of equity misvaluation on the predictive accuracy of bankruptcy models. We find that structural bankruptcy prediction models are not affected by misvaluation. However, for hazard models, forecasting accuracy for properly-valued firms is greater than for misvalued firms and model forecasting accuracy improves significantly if model coefficients vary with misvaluation. Our results show the importance of taking stock market misvaluation into account when forecasting bankruptcies using hazard models.
Number of Pages in PDF File: 32
Keywords: bankruptcy prediction, market efficiency, accounting information relevance
JEL Classification: G33, G14, M41
Date posted: September 5, 2010 ; Last revised: April 22, 2015
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