Predicting Corporate Financial Distress: A Time-Series CUSUM Methodology

Predicting Corporate Financial Distress: A Time-Series CUSUM Methodology The ability to predict corporate financial distress can be strengthened using models that account for serial correlation in the data, incorporate information from more than one period and include stationary explanatory variables. This paper develops a stationary financial distress model for AMEX and NYSE manufacturing and retailing firms based on the statistical methodology of time-series Cumulative Sums (CUSUM). The model has the ability to distinguish between changes in the financial variables of a firm that are the result of serial correlation and changes that are the result of permanent shifts in the mean structure of the variables due to financial distress. Tests performed show that the model is robust over time and outperforms similar models based on the popular statistical methods of Linear Discriminant Analysis and Logit. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Predicting Corporate Financial Distress: A Time-Series CUSUM Methodology

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Publisher
Springer Journals
Copyright
Copyright © 1999 by Kluwer Academic Publishers
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1023/A:1008326706404
Publisher site
See Article on Publisher Site

Abstract

The ability to predict corporate financial distress can be strengthened using models that account for serial correlation in the data, incorporate information from more than one period and include stationary explanatory variables. This paper develops a stationary financial distress model for AMEX and NYSE manufacturing and retailing firms based on the statistical methodology of time-series Cumulative Sums (CUSUM). The model has the ability to distinguish between changes in the financial variables of a firm that are the result of serial correlation and changes that are the result of permanent shifts in the mean structure of the variables due to financial distress. Tests performed show that the model is robust over time and outperforms similar models based on the popular statistical methods of Linear Discriminant Analysis and Logit.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Sep 30, 2004

References

  • Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy
    Altman, E.I.

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