Bankruptcy Prediction of Industrial Industry in the UK

Abstract

We make comparison between 6 models including (1) Altman's (1968) z-score; (2) Model 1: z-score model with adjusted coefficients; (3) Model 2: z-score model with modified variables; (4) Model 3: dynamic logic model; (5) Merton distance to default (DD) model (Bharath & Shumway, 2008) and (6) backpropagation network model (Lippman, 1987). We assess the relative information content of these models regarding their bankruptcy prediction capability. Our tests show that dynamic logic model and DD model both provide significantly more information than the others while DD model has the highest prediction accuracy in the out of sample test. It is also worth noticing that altering coefficients and adjusting variables of the original z-score model could not significantly improve the predictive power of z-score model regarding companies in the industrial industry in the UK.