Doomed Firms: An Econometric Analysis of the Path to Failure

250 Pages·2003·28.436 MB·English

by  P.J. Cybinski

DOOMED FIRMS
To Matt
and to the memory of my dear mother
Doomed Firms
An Econometric Analysis of the Path to Failure
P.J. CYBINSKI
School of Economics
Faculty of Commerce and Administration
Griffith University,
Brisbane, Australia
First published 2003 by Ashgate Publishing
Reissued 2018 by Routledge
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Copyright© P.J. Cybinski 2003
P.J. Cybinski has asserted her right under the Copyright, Designs and Patents Act,
1988, to be identified as the author of this work.
All rights reserved. No part of this book may be reprinted or reproduced or utilised
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The publisher has gone to great lengths to ensure the quality of this reprint but
points out that some imperfections in the original copies may be apparent.
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A Library of Congress record exists under LC control number: 2003056037
ISBN 13: 978-1-138-71197-6 (hbk)
ISBN 13: 978-1-315-19935-1 (ebk)
Contents
List of Figures x i
List of Tables xiii
Preface XV
PART I THEORETICAL ISSUES 1
1 Introduction 3
1.1 The Distress Continuum 4
1.2 Study Methodology 6
1.3 Background and Position of the Book 6
1.4 Structure of the Book 8
1.5 Publications 9
2 Precursors and Challenges in the Literature 11
2.0 Introduction 11
2.1 The Pioneering Models 12
2.1.1 Beaver (1966) - Univariate Models 12
2.1.2 Altman (1968) and Early Followers - Multiple Discriminant
Analysis Models 13
2.2 The Research of the 1980s - The Logit Model 14
2.2.1 Ohlson (1980) 15
2.2.2 Zavgren (1983) 16
2.3 The Choice of Independent Variables and Theories of Bankruptcy 18
2.3.1 Models from the Probability and Statistics Literature 19
2.3.2 The Cash Flow Model 19
2.4 The Time Dimension and Macro-Economic Conditions 21
' 2.4.1 Rose, Andrews and Giroux (1982) 22
2.4.2 Mensah (1984) 23
2.4.3 Kane, Richardson and Graybeal (1996) 24
2.5 Statistical Methodology 24
2.5.1 Zmijewski (1984) 25
2.5.2 Marais, Patell and Wolfson (1984) 26
2.6 The Distress Continuum 26
vi Doomed Firms
2.6.1 Survival Analysis 28
2.6.2 Formal Models 29
2.6.3 Gilbert, Menon and Schwartz (1990) 31
2.6.4 Flagg, Giroux and Wiggins (1991) - A Failing Company Model 32
2.6.5 Multivariate Time Series Process - Theodossiou (1993) 33
2.6.6 Hill, Perry and Andes (1996) 33
2.7 Emerging Technologies 34
2.7.1 Neural Networks 34
2.7.2 Chaos Theory 39
2.7.3 Latest Techniques 41
2.8 Major Challenges and Future Directions 41
2.9 Conclusion 43
3 Failure of Firms as Process: A New Modelling Methodology 45
3.0 Introduction 45
3.1 Problems in Empirical Single-Equation Bankruptcy Analysis 46
3.1.1 Estimating Probabilities of Failure 47
3.1.2 A Critical View 48
3.2 Emergent Research Objectives 50
3.2.1 Valid Accommodation of the Available Data into Appropriate
Models 50
3.2.2 Addressing the Problem of Sample Selection Bias 53
3.2.3 Improving Model Specification for Relevance over Time 53
3.2.4 Improving Model Specification to Reflect Dynamics 54
3.2.5 Improving Model Completeness 55
3.3 A New Methodology 55
3.4 Constructing and Testing General Multi-Equation Models 58
3.4.1 Techniques for Estimating the Parameters in a Linear
Simultaneous System of Equations 60
3.5 Applying Multi-Equation Models to the Area of Financial Distress 61
3.5.1 A Family of Models for Estimating the Risk of Failure 63
3.6 Conclusion 66
PART II EMPIRICAL ISSUES: TOWARDS A DYNAMIC
MODELLING OF FINANCIAL DISTRESS 69
4 The Internal Environment: The Financial Ratios 71
4.0 Introduction 71
Contents vii
4.1 The Relationship Between the Financial Variables and Financial
Distress 71
4.1.1 Modelling Bankruptcy 72
4.2 The Ratios 73
4.3 The Data 74
4.3.1 Missing Values 75
4.3.2 Measurement Problems: Extreme Values and Confounded
Ratios 75
4.3.3 Ratios where Measurement Problems Existed 77
4.3.4 Descriptive Statistics: Mean Values For The Ratios by Lag
Year 77
4.4 The Binary Dependent or Outcome Variable - A Definition of
Failure 78
4.5 A Logit Analysis of Bankruptcy Risk Related to the Internal
Variables of the Firm 80
4.5.1 Stepwise Analysis in Stages 80
4.5.2 The Significant Financial Variables to Failure Risk 81
4.5.3 A Note on Classification 84
4.5.4 The Signs of the Coefficients 85
4.6 Conclusion 88
5 The External Environment: The Impact of the Macroeconomy 91
5.0 Introduction 91
5.0.1 The Failing Firm in the Macroeconomy 91
5.0.2 Some Methodological Issues 92
5.1 Principal Components Analysis of the External Economic
Variables of the USA 93
5.1.1 The Five External Factors 95
5.2 Statistical Artifact of the ‘Economy Growth’ Factor 99
5.3 Structuring the Variables Representing the External Environment:
Distributed Lag Models on the Principal Components 100
5.3.1 Experimentation with Different Lag Models Using the Service
Industry Dataset 100
5.3.2 Conclusions on the Lag Model Weights 102
5.4 The External Variables Logit Model 102
5.4.1 The Meaning of the External Variables Model 103
5.5 Conclusions 105
viii Doomed Firms
6 Combining the Impact of the Internal and External Factors on
Financial Distress 109
6.0 Introduction 109
6.1 A Combined Financial Distress Model for Bankrupt Service
Companies 109
6.1.1 The Significant Financial Variables to Failure Risk 110
6.1.2 The Significant External Variables to Failure Risk 111
6.1.3 The Combined Model Equation Assuming Independence Within
Firm-Years 111
6.1.4 The Sign of the Coefficients 113
6.1.5 Independence of the Internal and External Variable Sets on
Failure Risk 114
6.2 How Important are the Economic Variables Compared to the Financial
Variables in Influencing Failure Risk? 115
6.3 Comparison of the Average Estimated Probabilities of Failure for
Each Lag Year 115
6.4 Applying the Failure Risk Model to Another Industry 118
6.5 Conclusion 120
7 A Dynamic Model of Financial Distress: The Path to Failure 123
7.0 Introduction 123
7.1 Inclusion of Lagged Risk in a Single-Equation Logit Model of
Failure Risk 124
7.1.1 Sensitivity Analysis to Failure Risk Estimated for the Fifth Year
Prior to Failure 127
7.1.2 Successive Model Iterations of Failure Risk on Lagged Risk 127
7.2 Multi-equation Models 132
7.2.1 Seemingly Unrelated Regression Models 132
7.2.2 Simultaneous Equation Models 139
7.2.3 Working Capital/Total Assets as a Dependent Variable 140
7.2.4 Interest Coverage after Tax as a Dependent Variable 144
7.3 Model Dynamics 148
7.4 Conclusions 151
PART III DISCUSSION AND CONCLUSIONS 153
8 Conclusion 155
8.0 Introduction: Towards Methodological Cohesion 155
Contents ix
8.1 Departures from the Past 155
8.2 Empirical Results 157
8.3 Limitations 161
8.4 Implications of the Research and Possible New Directions 162
8.5 Concluding Comments 163
PART IV APPENDICES 165
Appendix A—Appendix P 167-220
Bibliography 221
Index 231