Arto Suvas

Financial Distress Prediction in an International Context: A Review and Empirical Analysis of Altman's Z-Score Model

This paper assesses the classification performance of the Z-Score model in predicting bankruptcy and other types of firm distress, with the goal of examining the models usefulness for all parties, especially banks that operate internationally and need to assess the failure risk of firms. We analyze the performance of the Z-Score model for firms from 31 European and three non-European countries using different modifications of the original model. This study is the first to offer such a comprehensive international analysis. Except for the United States and China, the firms in the sample are primarily private, and include non-financial companies across all industrial sectors. We use the original Z-Score model developed by Altman, Corporate Financial Distress: A Complete Guide to Predicting, Avoiding, and Dealing with Bankruptcy (1983) for private and public manufacturing and non-manufacturing firms. While there is some evidence that Z-Score models of bankruptcy prediction have been outperformed by competing market-based or hazard models, in other studies, Z-Score models perform very well. Without a comprehensive international comparison, however, the results of competing models are difficult to generalize. This study offers evidence that the general Z-Score model works reasonably well for most countries (the prediction accuracy is approximately 0.75) and classification accuracy can be improved further (above 0.90) by using country-specific estimation that incorporates additional variables.

On utility function estimation of racetrack bettors

Abstract Racetrack betting makes possible the empirical study of peoples behavior in decision making under uncertainty and risk in laboratory-like but still natural conditions. Hence, it gives an opportunity to empirically test the classical assumptions of rational behavior. In this paper it is found that empirical data from a Finnish racetrack do not support risk-aversion or risk-neutrality of bettors. This gives rise to the question of under exactly which cultural and other circumstances various assumptions regarding attitudes toward risk actually apply.

Failure processes of young manufacturing micro firms in Europe

Purpose The purpose of this paper is to find out which different failure processes exist among the young manufacturing micro firms, and whether the representation of those processes differs first, in European countries, and second, among exporting and non-exporting firms. Design/methodology/approach The study is based on financial data of 1,216 manufacturing micro firms from European countries. Failure processes have been detected with a two stage-method: by extracting latent dimensions from financial variables with factor analysis, and then, by clustering the established factor scores. Findings With firms’ age, the number of different failure processes reduces from four to two. Strong evidence was found about the dominance of different failure processes in different countries for most firm age groups. Failure processes are not strongly associated with (non-)exporting. Originality/value This paper is the first one determining young manufacturing micro firms’ failure processes and comparing the representation of those processes in different firm subsets, either based on their country of origin or (non-)exporting behavior. Moreover, previous studies have not encompassed specific sectors, young or very small firms.

Financial and Non-Financial Variables as Long-Horizon Predictors of Bankruptcy

Reviews on financial distress prediction models indicate that these techniques give highly reliable estimates of probabilities of default (PDs) and loss given default (LGD) only for relatively short horizons, rarely beyond two years. Major stakeholders, e.g. investors and bank risk and capital analysts, therefore, have such models sanctioned by portfolio managers and regulators for the same short horizons; for example, the Basel Committee on Banking Supervision recommends PD and LGD estimates for one year. This is especially the case when financial variables make up the sole or primary estimates, and only a bit longer reliable estimators when these models include non-financial variables as additional early warning signals. Beyond three years, such models, regardless of their structure, rarely give reliable estimates, perhaps not much better than flipping a coin. The objective of this study is to assess the predictive ability of both financial and non-financial variable constructs for longer term horizons of up to ten years based on rigorous post-development distress and non-distress financial events in the Finnish environment. Our model, built with cross-section data from 2003, analyses results for 2004-2013. Results show that measures of solvency, turnover, industry risk, payment behaviour, and board member characteristics can be significant predictors of bankruptcies for as long as ten years. The most accurate long-range prediction results combine financial and non-financial variables. Subsequent tests should attempt to extend such models in a multi-country setting, whether or not bankruptcy regimes are similar across national borders.

The effect of national culture on financial distress prediction modelling: evidence from European countries

Financial distress prediction models developed by researchers in different countries differ significantly from each other with respect to the variables used and the coefficients estimated. Therefore, the use of country-specific models in international analysis across countries is questionable. National culture is an important factor behind the differences in the estimated models. The objective of this study is to investigate how national culture, in terms of Hofstedes cultural dimensions, affects the coefficients of country-specific models. A set of six financial variables is selected on theoretical grounds, and a financial distress prediction model is estimated by the logistic regression analysis for a group of European countries, separately for each country. The data include financial variables of 3,372,493 non-failed and 56,541 failed firm observations from 30 European countries. Then, the impact of cultural dimensions on the coefficients of the models is assessed by correlation and regression analyses. The findings show that the individualism vs. collectivism dimension has a strong effect on many of the coefficients. However, the coefficient of the equity ratio is not sensitive to cultural differences, and is therefore is a useful variable in models developed for international comparisons.

Cross-Sectional Valuation of Corporate Equities: The Finnish Evidence

Empirical evidence on factors affecting the valuation of shares is in many respects inconsistent. In this study, several earlier models are tested using Finnish data. The results are similar to those obtained with U.S. data. The risk variables (the market models) perform disturbingly poorly, as is the case in earlier studies. The importance of growth is confirmed by a new specification that works well across the models tested.