Some New Models for Financial Distress Prediction in the UK

Xfi - Centre for Finance and Investment Discussion Paper No. 10

46 Pages Posted: 5 Oct 2010  

Angela Christidis

University of Exeter Business School

Alan Gregory

University of Exeter - Xfi Centre; University of Exeter Business School

Date Written: September 4, 2010

Abstract

In this paper we develop some new models for the prediction of failure in the UK that add to the literature by showing that “dynamic logit” models that incorporate market variables of the form developed by Chava and Jarrow (2004) and Campbell et al (2008) add considerable power to pure accounting-based models. Importantly, we extend the logic of Campbell et al (2008) by showing that incorporating macro-economic variables adds predictive power, both in and out-of-sample, to market-based accounting models. Last, we show that adding industry controls gives a modest improvement to such models for UK firms in the case of a models based on accounting, market and economic variables, but a greater improvement in terms of a pure accounting based model.

Keywords: Variables, Dynamic Logit, Accounting Based Model

JEL Classification: G33

Suggested Citation

Christidis, Angela and Gregory, Alan, Some New Models for Financial Distress Prediction in the UK (September 4, 2010). Xfi - Centre for Finance and Investment Discussion Paper No. 10. Available at SSRN: https://ssrn.com/abstract=1687166 or http://dx.doi.org/10.2139/ssrn.1687166

Angela Christidis (Contact Author)

University of Exeter Business School ( email )

University of Exeter
Xfi Building, Rennes Dr.
Exeter, EX4 4ST
United Kingdom

Alan Gregory

University of Exeter - Xfi Centre ( email )

University of Exeter
Xfi Building, Rennes Dr.
Exeter, EX4 3BZ
United Kingdom

University of Exeter Business School ( email )

Streatham Court
Xfi Building Rennes Dr.
Exeter, EX4 4JH
United Kingdom

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