Abstract
Using a large dataset that includes nearly 31,000 Greek private firms we examine the determinants of the probability of corporate financial distress. Using a multi-period logit model, we find that profitability, leverage, the ratio of retained earnings-to-total assets, size, the liquidity ratio, an export dummy variable, the tendency to pay out dividends and the growth rate in real GDP are strong predictors of the probability of financial distress for Greek private firms. A model including these variables exhibits the highest in-sample and out-of-sample performance in terms of correctly classifying firms that went bankrupt as more likely to go bankrupt. The predictive ability of the model remains when we increase the forecast horizon, suggesting that the model works well over short and longer time horizons.
Highlights
The failure of a firm is an event of major concern in economic life
The results show that all four variables are strongly associated with the probability of financial distress for Greek private firms, with profitability, retained earnings-to-total assets and size having a negative impact on the probability of financial distress while leverage has a positive effect on the probability of financial distress
This paper examines the probability of financial distress for private firms in a developing economy using the discrete hazard/multi-period logit approach (Shumway 2001)
Summary
The failure of a firm is an event of major concern in economic life. the prediction of corporate financial distress has received considerable attention in the field of corporate finance. In addition to being a developing economy where private firms predominate, Greece provides a challenging test for models predicting the probability of bankruptcy given the debt crisis that enveloped the country from 2009 to 2011 following the global financial crisis. We develop multi-period logit (discrete hazard) models to evaluate the variables that are significantly associated with the prediction of financial distress for Greek private firms.. In the literature to date, discrete hazard models have tended to be used to predict the probability of financial distress for publicly-traded firms in developed economies and tend to use both accounting information, usually in the form of accounting ratios, and stock market information; see, for example, Shumway (2001), Campbell et al (2008) and Charalambakis and Garrett (2016).
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