35 Years of studies on business failure: an overview of the classic statistical methodologies and their related problems
Balcaen, Sofie Ooghe, Hubert
Balcaen, Sofie
Ooghe, Hubert
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Publication Type
Journal article
Editor
Supervisor
Publication Year
2006
Journal
British Accounting Review
Book
Publication Volume
38
Publication Issue
1
Publication Begin page
63
Publication End page
93
Publication NUmber of pages
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Abstract
Over the last 35 years, business failure prediction has become a major research domain within corporate finance. Numerous corporate failure prediction models have been developed, based on various modelling techniques. The most popular are the classic cross-sectional statistical methods, which have resulted in various ‘single-period’ or static models, especially multivariate discriminant models and logit models. To date, there has been no clear overview and discussion of the application of classic statistical methods to business failure prediction. Therefore, this paper extensively elaborates on the application of (1) univariate analysis, (2) risk index models, (3) multivariate discriminant analysis, and (4) conditional probability models in corporate failure prediction. In addition, because there is no clear and comprehensive analysis in the existing literature of the diverse problems related to the application of these methods to the topic of corporate failure prediction, this paper brings together all problem issues and enlarges upon each of them. It discusses all problems related to: (1) the classical paradigm (i.e. the arbitrary definition of failure, non-stationarity and data instability, sampling selectivity, and the choice of the optimisation criteria); (2) the neglect of the time dimension of failure; and (3) the application focus in failure prediction modelling. Further, the paper elaborates on a number of other problems related to the use of a linear classification rule, the use of annual account information, and neglect of the multidimensional nature of failure. This paper contributes towards a thorough understanding of the features of the classic statistical business failure prediction models and their related problems.
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Keywords
Corporate Finance