ON THE PREDICTION OF CORPORATE FINANCIAL DISTRESS IN THE LIGHT OF THE FINANCIAL CRISIS: EMPIRICAL EVIDENCE FROM GREEK LISTED FIRMS
Evangelos C. Charalambakis
Bank of Greece
Abstract
This paper evaluates the impact of accounting and market-driven information on the prediction of bankruptcy for Greek firms using the discrete hazard approach. The findings show that a hazard model that incorporates three accounting ratio components of Z-score and three market-driven variables is the most appropriate model for the prediction of corporate financial distress in Greece. This model outperforms a univariate model that uses the expected default frequency (EDF) derived from the Merton distance to default model, a multivariate model that is exclusively based on accounting variables, a model that combines EDF and accounting variables and a multivariate model that uses only market-driven variables. In-sample forecast accuracy tests confirm the main results. The out-of-sample evidence also suggests that the model yields the highest predictive ability during financial crisis when using data prior to the financial crisis.
Keywords: financial distress; financial forecasting; hazard model; expected default frequency
JEL Classification: G13, G17, G33, C41
Acknowledgements: We would like to thank Ian Garrett, Heather Gibson, George Kouretas, Evangelia Papapetrou, Elias Tzavalis and seminar participants at the Economic Research Department of the Bank of Greece for their helpful comments. The views expressed are the author’s own and do not constitute policy of the Bank of Greece.
Correspondence:
Evangelos C. Charalambakis
Bank of Greece
21 E.Venizelos Avenue,
Athens,102 50
Email: echaralambakis@bankofgreece.gr
Tel: +30210-320 2644