Prediction of the failure of reorganization agreements under Colombia's corporate insolvency act

Abínzano, Isabel; Bonilla, Harold; Muga, Luis

doi:10.2139/ssrn.3954952

Cited by 1 publication

(4 citation statements)

References 19 publications

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“…This result is supported by previous insolvency studies (Ohlson, 1980; Tascón and Castaño, 2012). The negative sign of the NI/TA ratio, meanwhile, is consistent with the notion that a higher ratio of profitability to assets reduces the probability of failure in a reorganization process (Ohlson, 1980; Tian and Yu, 2017; Abinzano et al ., 2021).…”

Section: Resultssupporting

confidence: 83%

“…The dependent variable takes values in the interval [0, 1] and indicates the probability of belonging to the group of non-failed vs failed companies. In this particular case, the financial independent variables for the construction of the “ad hoc” model were extracted from a compendium of accounting and financial variables identified in previous studies as potential predictors of insolvency and bankruptcy (Abinzano et al ., 2021), using univariate analysis and multicollinearity tests to establish the selection criteria. Financial variables are commonly used both for bankruptcy prediction and as control variables to explain the results of reorganization proceedings (Stef and Bissieux, 2022; Corbae and D'Erasmo, 2021).…”

Section: Methodsmentioning

confidence: 99%

“…Financial variables are commonly used both for bankruptcy prediction and as control variables to explain the results of reorganization proceedings (Stef and Bissieux, 2022; Corbae and D'Erasmo, 2021). The following five variables, based on the criteria used by Abinzano et al . (2021), were selected: (Current Assets – Inventories)/Current Assets ((CA–I)/CA); Cash/Current Assets (C/CA); Cash/Total Assets (C/TA); Total Liabilities/Total Assets (TL/TA) and Net Income/Total Assets (NI/TA).…”

Section: Methodsmentioning

confidence: 99%

“…Addressing success prediction for reorganization processes, Abinzano et al . (2021) estimate the predictive ability of classical insolvency prediction models when applied to corporate reorganizations, finding that, although some financial variables relating to solvency, indebtedness or profitability show some predictive ability, none of the models is entirely satisfactory.…”

Section: Literature Reviewmentioning

confidence: 99%

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Duty calls: prediction of failure in reorganization processes

Abínzano

Bonilla

Muga

2023

JRF

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PurposeUsing data from business reorganization processes under Act 1116 of 2006 in Colombia during the period 2008 to 2018, a model for predicting the success of these processes is proposed. The paper aims to validate the model in two different periods. The first one, in 2019, characterized by stability, and the second one, in 2020, characterized by the uncertainty generated by the COVID-19 pandemic.Design/methodology/approachA set of five financial variables comprising indebtedness, profitability and solvency proxies, firm age, macroeconomic conditions, and industry and regional dummies are used as independent variables in a logit model to predict the failure of reorganization processes. In addition, an out-of-sample analysis is carried out for the 2019 and 2020 periods.FindingsThe results show a high predictive power of the estimated model. Even the results of the out-of-sample analysis are satisfactory during the unstable pandemic period. However, industry and regional effects add no predictive power for 2020, probably due to subsidies for economic activity and the relaxation of insolvency legislation in Colombia during that year.Originality/valueIn a context of global reform in insolvency laws, the consistent predictive ability shown by the model, even during periods of uncertainty, can guide regulatory changes to ensure the survival of companies entering into reorganization processes, and reduce the observed high failure rate.

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