Estimating the Probability of Financial Distress: International Evidence

Abstract

This study focuses on developing a new approach to estimating the ex-ante probability of financial distress by means of a model that could be applied to different economic and legal contexts. Our approach first consists of testing for the specification of the proposed model by using panel data methodology to eliminate the unobservable heterogeneity. Second, the model is cross-sectionally estimated to obtain an indicator of the probability of financial distress that incorporates the specificity of each company. We find that such a probability is accurately explained by a smaller number of theoretically underpinned factors than has been generally assumed.

Keywords: Financial insolvency, probability of financial distress, logit analysis

JEL Classification: G33