On the prediction of financial distress in developed and emerging markets: Does the choice of accounting and market information matter? A comparison of UK and Indian Firms

On the prediction of financial distress in developed and emerging markets: Does the choice of... We assess the contribution of accounting and market-driven information to the prediction of bankruptcy for UK and Indian firms to investigate whether the variables that predict financial distress well for US firms predict financial distress in another developed market and in an emerging market. For the UK we find a hazard model that combines book leverage and three equity market-based variables describes best the probability of corporate financial distress in UK and outperforms several competing models that include Z-score or its accounting ratio components, the expected default frequency (EDF), a model that combines Z-score and EDF and a model that uses three equity market predictors. However, we find that this model does not perform well in India as market information fails to predict bankruptcy. A model with two accounting ratios best estimates the probability of corporate financial distress in India. In-sample and out-of-sample forecasts confirm our core findings for both UK and Indian firms. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

On the prediction of financial distress in developed and emerging markets: Does the choice of accounting and market information matter? A comparison of UK and Indian Firms

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Publisher
Springer US
Copyright
Copyright © 2015 by Springer Science+Business Media New York
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-014-0492-y
Publisher site
See Article on Publisher Site

Abstract

We assess the contribution of accounting and market-driven information to the prediction of bankruptcy for UK and Indian firms to investigate whether the variables that predict financial distress well for US firms predict financial distress in another developed market and in an emerging market. For the UK we find a hazard model that combines book leverage and three equity market-based variables describes best the probability of corporate financial distress in UK and outperforms several competing models that include Z-score or its accounting ratio components, the expected default frequency (EDF), a model that combines Z-score and EDF and a model that uses three equity market predictors. However, we find that this model does not perform well in India as market information fails to predict bankruptcy. A model with two accounting ratios best estimates the probability of corporate financial distress in India. In-sample and out-of-sample forecasts confirm our core findings for both UK and Indian firms.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Jan 18, 2015

References

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