With One Shot, Which Bullet Would You Use? Market versus Accounting Data in Bankruptcy Prediction - Part II (A Strong Case of Using Nonparametric MDA in Bankruptcy Prediction)
The International Journal of Finance, 26(3), 2015
42 Pages Posted: 3 Apr 2016
Date Written: April 1, 2016
In this paper, we test the predictive power of a nonparametric multivariate discriminant model to predict corporate bankruptcy. In contrast with the previous literature, we employ not only accounting ratios, but also market and microstructure variables. The most important finding are that market variables alone are best at correctly classifying bankrupt firms, and that the nonparametric model is superior to the traditional, parametric models. This prevents the use of restrictive and unrealistic assumptions, while employing forward looking variables.
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