Dynamic forecasts of financial distress of Australian firms. (February 2015)

• Record Type: Journal Article
• Authors: Kim, Maria H.; Partington, Graham
• Is Part Of: Australian journal of management. Volume 40:Number 1(2015:Feb.)
• Page Start: 135
• Page End: 160
• Publication Date: 2015-02
• Subjects: Baseline hazard -- dynamic forecasts -- financial distress prediction -- proportional hazard -- survival analysis -- time-varying Cox regression model; Management -- Periodicals; Management -- Australia -- Periodicals; Business enterprises -- Finance -- Periodicals; Industrial management -- Australia -- Periodicals; 330
• DOI: 10.1177/0312896213514237
• Languages: English
• ISSNs: 0312-8962

Abstract

Dynamic forecasts of financial distress have received far less attention than static forecasts, particularly in Australia. This study, therefore, investigates dynamic probability forecasts for Australian firms. Novel features of the modelling are the use of time-varying variables in forecasts from a Cox model. Not only is this one of relatively few studies to apply dynamic variables in forecasting financial distress, but to the authors' knowledge it is the first to provide forecasts of survival probabilities using the Cox model with time-varying variables. Forecast accuracy is evaluated using receiver operating characteristics curves and the Brier Score. It was found that the dynamic model had superior predictive power, in out-of-sample forecasts, to the traditional Cox model and to the logit model.