Bankruptcy Prediction Model: The Case of the United States

Abstract

United States has faced a growing number of corporate bankruptcies since the subprimes crisis. This paper aims to develop an econometric forecasting model constructed from three simple and easily available financial ratios. We used a matched-pair sample of US quoted firms with half of the sample filing for chapter 11 (reorganization procedure) of the United States Bankruptcy Code for the period 2000–2012 and conducted logit regression analysis. We found that this model using three simple, few correlated and easily available financial ratios as explanatory variables shows a prediction accuracy of more than 80 percent. Besides the academic contribution to the research relative to the bankruptcy prediction, the empirical results of this study may be useful for practitioners, particularly for financial institutions interested in the probability of default of their partners.