Predicting Business Failures in Canada

Abstract:     
Empirical researchers and practitioners frequently use the bankruptcy prediction models developed by Altman (1968) and Ohlson (1980). This poses a potential problem for practitioners in Canada and researchers working with Canadian data as the Altman and Ohlson models were developed using US data. The Canadian business and legal environment differs from the US environment. Also, the business environment has changed in the more than twenty-five years since the Altman and Ohlson models were estimated. We identified three Canadian bankruptcy prediction models, Springate (1978), Altman and Levallee (1980), and Legault and Veronneau (1986). These models were tested against the Altman and Ohlson models using recent data to determine the robustness of all models over time and the applicability of the Altman and Ohlson models to the Canadian environment.

The performance of the Springate (1978), Altman and Levallee (1980), Altman (1968), and Ohlson (1980) models on the 1987-2002 sample was significantly below the performance reported by the authors in their original studies. The performance of the Legault and Veronneau (1986) model was consistent between the original estimation period and the 1987-2002 time period

The overall classification accuracy of the Ohlson model is comparable to the Springate (1978) and Legault and Veronneau (1986) models and greater than the Altman and Levallee (1980) model. The Springate model has the lowest Type I error rate and the Legault and Veronneau model has the lowest Type II error rate. The performance of the Altman (1968) model is generally weaker than the other models.

Number of Pages in PDF File: 35

JEL Classification: M41, M47, G33

working papers series