Forecasting Bankruptcy More Accurately: A Simple Hazard Model

Tyler Shumway
1999 Social Science Research Network  
I argue that hazard models are more appropriate for forecasting bankruptcy than the single-period models used previously. Single-period bankruptcy models give biased and inconsistent probability estimates while hazard models produce consistent estimates. I describe a simple technique for estimating a discrete-time hazard model with a logit model estimation program. Applying my technique, I nd that about half of the accounting ratios that have been used in previous models are not statistically
more » ... not statistically signi cant bankruptcy predictors. Moreover, several market-driven variables are strongly related to bankruptcy probability, including market size, past stock returns, and the idiosyncratic standard deviation of stock returns. I propose a model that uses a combination of accounting ratios and market-driven variables to produce more accurate out-of-sample forecasts than alternative models.
doi:10.2139/ssrn.171436 fatcat:665tjxel2bgjvbodtsv235zkau