Empirical Comparison of Hazard Models in Predicting SMEs Failure

Quantitative Finance (Volume 18, 2018 - Issue 3)

55 Pages Posted: 25 Jun 2014 Last revised: 26 Feb 2018

See all articles by Jairaj Gupta

Jairaj Gupta

University of Birmingham

Andros Gregoriou

University of Brighton

Tahera Ebrahimi

Birmingham City University

Date Written: February 19, 2018

Abstract

This study aims to shed light on the debate concerning the choice between discrete-time and continuous-time hazard models in making bankruptcy or any binary prediction using interval censored data. Building on the theoretical suggestions from various disciplines, we empirically compare widely used discrete-time hazard models (with logit and clog-log links) and continuous-time Cox Proportional Hazards (CPH) model in predicting bankruptcy and financial distress of the United States Small and Medium-sized Enterprises (SMEs). Consistent with the theoretical arguments, we report that discrete-time hazard models are superior to continuous-time CPH model in making binary predictions using interval censored data. Moreover, hazard models developed using failure definition based jointly on bankruptcy laws and firms’ financial health exhibit superior goodness of fit and classification measures, in comparison to models that employ failure definition based either on bankruptcy laws or firms’ financial health.

Keywords: Discrete Hazard Models, Cox Proportional Hazard, Financial Distress, Bankruptcy, SMEs

JEL Classification: G33, C25, C41, C53

Suggested Citation

Gupta, Jairaj and Gregoriou, Andros and Ebrahimi, Tahera, Empirical Comparison of Hazard Models in Predicting SMEs Failure (February 19, 2018). Quantitative Finance (Volume 18, 2018 - Issue 3), Available at SSRN: https://ssrn.com/abstract=2457917 or http://dx.doi.org/10.2139/ssrn.2457917

Jairaj Gupta (Contact Author)

University of Birmingham ( email )

Edgbaston, Birmingham B15 2TT
United Kingdom
00-44-7795904913 (Phone)

Andros Gregoriou

University of Brighton ( email )

Brighton
Brighton, BN2 4AT
United Kingdom

Tahera Ebrahimi

Birmingham City University ( email )

The Parkside Building
5 Cardigan St
Birmingham, West Midlands B4 7BD
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
423
Abstract Views
2,567
rank
87,287
PlumX Metrics