Comparing the Performance of Market-Based and Accounting-Based Bankruptcy Prediction Models

38 Pages Posted: 5 Mar 2007  

Vineet Agarwal

Cranfield University - School of Management

Richard Taffler

Manchester Business School

Date Written: September 18, 2006

Abstract

Recently developed corporate bankruptcy prediction models adopt a contingent-claims valuation approach. However, despite their theoretical appeal, tests of their performance compared with traditional simple accounting-ratio-based approaches are limited in the literature. We find the two approaches capture different aspects of bankruptcy risk, and while there is little difference in their predictive ability in the UK, the z-score approach leads to significantly greater bank profitability in conditions of differential decision error costs and competitive pricing regime.

Keywords: failure prediction, credit risk, option-pricing models, z-score, bank profitability

JEL Classification: C52, G13, G33, M41

Suggested Citation

Agarwal, Vineet and Taffler, Richard, Comparing the Performance of Market-Based and Accounting-Based Bankruptcy Prediction Models (September 18, 2006). Available at SSRN: https://ssrn.com/abstract=968252 or http://dx.doi.org/10.2139/ssrn.968252

Vineet Agarwal (Contact Author)

Cranfield University - School of Management ( email )

Bedfordshire, MK43 0AL
United Kingdom
00 44 (0) 1234 754543 (Phone)
00 44 (0) 1234 752554 (Fax)

Richard J. Taffler

Manchester Business School ( email )

Crawford House
Oxford Road
Manchester M13 9PL
United Kingdom

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