A market-based framework for bankruptcy prediction

Comparing the Reliability of Accounting-Based and Market-based Prediction Models

“…This is mainly due to the accounting-based models used by them (Altman's 1968 model andOhlson's 1980 model) are outdated and contain many weaknesses as addressed in the literature. Our accounting-based models were generated by using the up-to-date methodology and the result is consistent with Reisz and Perlich (2007) and Agarwal and Taffler (2008) who found accounting-based model to be superior than market-based model (Reisz and Perlich 2007;Agarwal and Taffler 2008).…”

“…Reisz and Perlich (2007) found that Altman's (1968) z-score performed better at failure prediction over a 1-year period than their two newly developed KMV-type. However, their study indicated that market-based models performed better over longer horizons (3 to 10 years).…”

“…Market-based models using the Black and Scholes (1973) and Merton (1974) contingent claims approach provide attractive option and several recent papers have been using this methodology to assess the likelihood of financial distress of companies such as studies by Bharath and Shumway (2004), Hillegeist et al (2004), Vassalou and Xing (2004), Reisz and Perlich (2007) and Campbell, Hilscher and Szilagyi (2008) (Bharath and Shumway 2004;Hillegeist, Keating et al 2004;Vassalou and Xing 2004;Reisz and Perlich 2007;Campbell, Hilscher et al 2008). Market-based model counters most of the criticisms on accounting-ratio-based models whereby: (i) the marketbased model provides a sound theoretical approach for distressed company, (ii) in efficient markets, stock prices will reflect all the information contains in the financial statements and will also reflect information which is not captured by financial statements, (iii) company accounting policies unable to influence market variables, (iv) future cash flow of company is reflected in the stock market price, and therefore it is a reliable variable to predict the future of the company, and (v) the market-based models is not time or sample dependent (Agarwal and Taffler 2008).…”

Distressed Firm and Bankruptcy Prediction in an International Context: A Review and Empirical Analysis of Altman's Z-Score Model

“…In Reisz and Perlich (2007), it was assessed as a better measure for short-term bankruptcy prediction than the market-based models and in Das, Hanouna and Sarin, (2009), it was shown to perform comparably to the Merton structural, market-based approach for CDS spread estimation. The question of whether market data is better than acccounting data has been raised many times.…”

Decisões de estrutura de capital: evidências empíricas a partir de modelo estrutural de crédito

“…Isso representa uma vantagem sobre os modelos que utilizam dados contábeis para estimar falência, pois, como afirmam Vassalou e Xing (2004 :833 ), os preços de mercado refletem as expectativas dos investidores acerca do desempenho das empresas, por isso contêm informações sobre o seu futuro. Reisz e Perlich (2004:3) também afirmam que os preços de mercado, considerando que este último é razoavelmente eficiente, devem conter informações mais atualizadas do que as contábeis apresentadas com menor freqüência e com base em fatos históricos.…”