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The Impact of Equity Misvaluation on Predictive Accuracy of Bankruptcy Models

32 Pages Posted: 5 Sep 2010 Last revised: 22 Apr 2015

George E. Batta

Claremont McKenna College - Robert Day School of Economics and Finance

Wan Wongsunwai

The Chinese University of Hong Kong (CUHK)

Date Written: May 2014

Abstract

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.

Keywords: bankruptcy prediction, market efficiency, accounting information relevance

JEL Classification: G33, G14, M41

Suggested Citation

Batta, George E. and Wongsunwai, Wan, The Impact of Equity Misvaluation on Predictive Accuracy of Bankruptcy Models (May 2014). Journal of Fixed Income, Vol. 24, No. 2, 2014. Available at SSRN: https://ssrn.com/abstract=1671685 or http://dx.doi.org/10.2139/ssrn.1671685

George E. Batta

Claremont McKenna College - Robert Day School of Economics and Finance ( email )

500 E. Ninth Street
Claremont, CA 91711
United States

Wan Wongsunwai (Contact Author)

The Chinese University of Hong Kong (CUHK) ( email )

Shatin, N.T.
Hong Kong
Hong Kong

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