Impact of the Czech Changing Economic Environment on Bankruptcy Models

Abstract

This paper is focused on corporate bankruptcy prediction models and methods to determine whether the evaluated entity has a higher probability of bankruptcy. Consequences of corporate financial distress for other business partners can be devastating and end with an insolvency proposal. To avoid these consequences, corporations need tools to provide reliable answers. Since the 1960s plenty of models have been created but not all of them are accurate enough for the current market conditions of the Czech Republic. The Czech Republic has witnessed an increasing number of insolvency proposals since 2008. There are several reasons such as the new insolvency law, global economic crisis, entering the European Union, and completion of the economic transformation, etc. The changing economic environment necessitates of testing current methods and models because reliability can decrease over time as many studies have shown. The key question is if sufficient tools exist for predicting the level of corporate financial distress that could lead to insolvency and corporate bankruptcy. Such tools should provide reliable results and to support business decision making. On one hand we need to forecast probability of corporate bankruptcy. On the other hand, we do not want to stigmatize healthy companies by classifying them as unhealthy. The model cannot fail in either way. It must identify healthy companies as those with a low risk of bankruptcy and unhealthy entities as entities with a high risk of bankruptcy. Current conditions differ significantly from the past. Czech insolvency law but there are also problems connected with the insolvency register (Smrcka, Advances in Information Systems and Technologies, 2013). Financial data are the key input for the majority of models but their availability is less than before. Though obligated to publish, many companies do not do so, often as a consequence of a poor corporate Int Adv Econ Res (2015) 21:117–118 DOI 10.1007/s11294-014-9481-0