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. We compare Canadian bankruptcy prediction models developed by Springate (1978), Altman and Levallee (1980), and Legault and Veronneau (1986) 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.

Our results indicate that the models developed by Springate (1978) and Legault and Veronneau (1986) yield similar results to the Ohlson (1980) model while being simpler and requiring less data. The Altman (1968) and Altman and Levallee (1980) models generally have lower performance than the other models. All models have stronger performance with the original coefficients than the re-estimated coefficients. Our results regarding the Altman and Ohlson models are consistent with Begley, Ming, and Watts (1996). They found that the original version of the Ohlson model is superior to the Altman model and is robust over time.

Keywords: Business failure models, Bankruptcy prediction, Altman model, Ohlson model

JEL Classification: M41, M47, G33

Accepted Paper Series