Forecasting Bankruptcy More Accurately: A Simple Hazard Model

33 Pages Posted: 12 Aug 1999

See all articles by Tyler Shumway

Tyler Shumway

University of Michigan at Ann Arbor, The Stephen M. Ross School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: July 16, 1999

Abstract

I argue that hazard models are more appropriate for forecasting bankruptcy than the single-period models used previously. Single-period bankruptcy models give biased and inconsistent probability estimates while hazard models produce consistent estimates. I describe a simple technique for estimating a discrete-time hazard model with a logit model estimation program.

Applying my technique, I find that about half of the accounting ratios that have been used in previous models are not statistically significant bankruptcy predictors. Moreover, several market-driven variables are strongly related to bankruptcy probability, including market size, past stock returns, and the idiosyncratic standard deviation of stock returns. I propose a model that uses a combination of accounting ratios and market-driven variables to produce more accurate out-of-sample forecasts than alternative models.

JEL Classification: G33, M41

Suggested Citation

Shumway, Tyler, Forecasting Bankruptcy More Accurately: A Simple Hazard Model (July 16, 1999). Available at SSRN: https://ssrn.com/abstract=171436 or http://dx.doi.org/10.2139/ssrn.171436

Tyler Shumway (Contact Author)

University of Michigan at Ann Arbor, The Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-763-4129 (Phone)
734-936-0274 (Fax)

HOME PAGE: http://www.umich.edu/~shumway

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