Abstract
The objective of the study is to perform corporate distress prediction for an emerging economy, such as India, where bankruptcy details of firms are not available. Exhaustive panel dataset extracted from Capital IQ has been employed for the purpose. Foremost, the study contributes by devising novel framework to capture incipient signs of distress for Indian firms by employing a combination of firm specific parameters. The strategy not only enables enlarging the sample of distressed firms but also enables to obtain robust results. The analysis applies both standard Logistic and Bayesian modeling to predict distressed firms in Indian corporate sector. Thereby, a comparison of predictive ability of the two approaches has been carried out. Both in-sample and out of sample evaluation reveal a consistently better predictive capability employing Bayesian methodology. The study provides useful structure to indicate the early signals of failure in Indian corporate sector that is otherwise limited in literature.
Highlights
Major developments in bankruptcy prediction modeling happened in late 1960s (Beaver 1966; Altman 1968; Ohlson 1980; Altman et al 1994)
Beaver (1966) proposed univariate model that is based on 30 financial ratios for 79 pair of bankrupt and non-bankrupt firm and found that working capital funds flow to total assets ratio and net income to total assets ratio are the best discriminators for bankruptcy prediction
To suggest early indicators and prediction of distress in the Indian corporate sector, this paper considers varied financial ratios to measure the probability of bankruptcy from 2006 to 2015
Summary
Major developments in bankruptcy prediction modeling happened in late 1960s (Beaver 1966; Altman 1968; Ohlson 1980; Altman et al 1994). Beaver (1966) proposed univariate model that is based on 30 financial ratios for 79 pair of bankrupt and non-bankrupt firm and found that working capital funds flow to total assets ratio and net income to total assets ratio are the best discriminators for bankruptcy prediction. He proposed the four assumptions in relation with firms’ distress positions viz., (i) larger the reserves, smaller is the probability of failure; (ii) larger the net liquid-asset flow from operations, smaller is the probability of failure; (iii) greater the amount of debt held, larger is the probability of failure; and, (iv) huge expenditures for operations lead to higher probability of failure
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