An Error Component Logit Analysis of Corporate Bankruptcy and Insolvency Risk in Australia

18 Pages Posted: 8 Feb 2007

See all articles by David A. Hensher

David A. Hensher

University of Sydney Business School

Stewart Jones

University of Sydney – School of Business

William H. Greene

New York University Stern School of Business

Abstract

This paper introduces a four-state failure model to depict a wider range of distress scenarios that public companies typically face in the real world. We use a multinomial error component logit model to analyse firm failure, a major advance on the modelling techniques used in previous research. The error component logit model, being an extension of the more familiar mixed logit model, relaxes several questionable statistical assumptions associated with standard models. Using a sample of Australian firms we provide an interpretative illustration of the error component logit model and contrast its behavioural performance with the standard logit model widely used in previous research.

Suggested Citation

Hensher, David A. and Jones, Stewart and Greene, William H., An Error Component Logit Analysis of Corporate Bankruptcy and Insolvency Risk in Australia. Economic Record, Vol. 83, No. 260, pp. 86-103, March 2007. Available at SSRN: https://ssrn.com/abstract=961900 or http://dx.doi.org/10.1111/j.1475-4932.2007.00378.x

David A. Hensher

University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia
+ 61 2 9351 0071 (Phone)
+ 61 2 9351 0088 (Fax)

HOME PAGE: http://www.its.usyd.edu.au/about_itls/staff/davidh.asp

Stewart Jones (Contact Author)

University of Sydney – School of Business ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia

William H. Greene

New York University Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States
212-998-0876 (Phone)

HOME PAGE: http://people.stern.nyu.edu/wgreene

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