Abstract - Bankruptcy Prediction

The hazard rate models used in the recent bankruptcy literature theorize the eventual failure of entire population, in a financial setting which translates into the collapse of the whole economy. We reject the assumption of complete break-down, in fact believing a fraction of the subjects shall be long-run survivors; we propose a mixture model to correct not only for survivors but also for the censored observations. Moreover this study models the event and the timing of default incident at the same time. For the event of default and the timing of default we utilize a logistic regression. The results have justified the advantage of our model over the standard hazard rate models and proved its predictive power. The companies identified as high default risk by our model proved to deliver extremely low returns in the market and all of the 131 bankruptcies in four years following our sample period were coming from the high risk group.

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