Forecasting European Corporate Bankruptcy

Abstract

Recent research on bankruptcy prediction models has provided mixed results on the predictive performance of several econometric techniques with various sets of predictors, which include macroeconomic and industry specific predictors. This study re-estimates four econometric techniques, MDA, logit, probit, and Hazard models using European firms from three time periods that correspond with the pre-credit crisis period (2004-2006), credit crisis period (2007-2009), and sovereign debt crisis period (2010-2013). When assessing these models based on accuracy and information content the results were inconclusive regarding a best econometric technique or model for the prediction of bankruptcy in Europe. This study however found that macroeconomic factors can improve the performance of bankruptcy prediction models within the estimation sample. But these factors are non-stationary, in line with the accounting variables, leading to a loss of accuracy and information content over time. Industries do systematically differ in their likelihood of firm bankruptcy and this can be captured using both inter-industry and intra-industry models.