Abstract
In face of the current economic and financial environment, predicting corporate bankruptcy is arguably a phenomenon of increasing interest to investors, creditors, borrowing firms, and governments alike. Within the strand of literature focused on bankruptcy forecasting we can find diverse types of research employing a wide variety of techniques, but only a few researchers have used survival analysis for the examination of this issue. We propose a model for the prediction of corporate bankruptcy based on survival analysis, a technique which stands on its own merits. In this research, the hazard rate is the probability of ‘‘bankruptcy’’ as of time t, conditional upon having survived until time t. Many hazard models are applied in a context where the running of time naturally affects the hazard rate. The model employed in this paper uses the time of survival or the hazard risk as dependent variable, considering the unsuccessful companies as censured observations.
Highlights
The problem of corporate bankruptcy has been, and will surely remain a topic of particular interest to a broad set of economic agents
In this paper we propose a model for corporate bankruptcy prediction based on survival analysis
For banks that did not failed, censored survival time was defined as the time since December 31st, of the year considered for the calculation of financial ratios, until the 31st December of the year of a paired failed bank
Summary
The problem of corporate bankruptcy has been, and will surely remain a topic of particular interest to a broad set of economic agents. The corporate bankruptcy—economic, financial or legal—can result from a diverse set of complex causes, both of internal and external nature, that can be attributed, for example to a weak organizational structure, the company’s own strategy, technological changes, or to changing economic conditions. It seems arguable that the models developed for corporate bankruptcy prediction can be as much as useful as helpful for decision making. Despite being an unusually employed technique in this type of study, it is believed that its possibilities seem to be have been still little explored, and we believe this paper can offer a significant contribute to the existing research in the bankruptcy prediction field
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