Bankruptcy Prediction Models
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Bankruptcy & Prediction Models
Introduction
There are many reasons a firm finds themselves in a bankruptcy state of affairs. Economic factors include industry weakness and poor location. Financial factors include too much debt and insufficient capital. Financial difficulties are usually the result of a series of errors, misjudgments, and interrelated weaknesses that can be attributed directly or indirectly to management's ineffectiveness (Brigham, 2002). The economic and social costs of corporate failure are considerable.
Attempts to develop bankruptcy prediction models began seriously sometime in the late 1960's most notably by Edward Altman, and continue throughout today. The purpose of this paper is to describe some of the various bankruptcy prediction models used in the past several decades. The history of various models will be discussed along with their degree of success, strengths, weaknesses, and the factors that affect their effectiveness.
Bankruptcy prediction models are more generally known as measures of financial distress (Brigham, 2002). There are several measures in the development of financial distress which include univariate analysis, multivariate analysis, and logit analysis...