Corporate Failure Prediction Modeling: Distorted by Business Groups' Internal Capital Markets?

23 Pages Posted: 13 Aug 2006

See all articles by Nico Dewaelheyns

Nico Dewaelheyns

KU Leuven - Faculty of Business and Economics (FEB)

Cynthia Van Hulle

KU Leuven - Department of Applied Economics

Abstract

Most models in the bankruptcy prediction literature implicitly assume companies are stand-alone entities. However, in view of the importance of business groups in Continental Europe, ignoring group ties may have a negative impact on predictive reliability. We find that models encompassing both bankruptcy variables defined at subsidiary level and at group level have a substantially better fit and classification performance. Furthermore we find that the group's support causes improved survival chances for subsidiaries, especially when these subsidiaries belong to the group's core business. Overall our results are consistent with existing theoretical and empirical findings from the internal capital markets literature.

Suggested Citation

Dewaelheyns, Nico and Van Hulle, Cynthia, Corporate Failure Prediction Modeling: Distorted by Business Groups' Internal Capital Markets?. Journal of Business Finance & Accounting, Vol. 33, No. 5-6, pp. 909-931, June/July 2006, Available at SSRN: https://ssrn.com/abstract=924033 or http://dx.doi.org/10.1111/j.1468-5957.2006.00009.x

Nico Dewaelheyns (Contact Author)

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Cynthia Van Hulle

KU Leuven - Department of Applied Economics ( email )

Naamsestraat 69
B-3000 Leuven
BELGIUM
32-16-326734 (Phone)
32-16-326732 (Fax)

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