The effects of strategic bankruptcy and contingent liabilities on the performance of bankruptcy prediction models

Doris Ann (Dori) Lombard, Pace University

Abstract

The purpose of the study is to analyze the effects of strategic bankruptcy and contingent liabilities footnote disclosure (as required by the Statement of Financial Accounting Standards No. 5) on the performance of bankruptcy prediction models. The results of the study indicate the following: (1) Because strategic bankruptcies have been used as a business strategy to accomplish a corporate goal, when strategic bankruptcies are grouped with financial bankruptcies, noise is created. Partitioning bankrupt firms into strategic and financial bankrupt firms cleans the noise and improves the accuracy of the bankruptcy prediction models. (2) The Type I error rate and accuracy of the model improved significantly with the inclusion of contingent liability variables. A proxy for the accrual of contingent liabilities included in the financial statements is not a good discriminator of bankrupt and nonbankrupt firms. A proxy for text length of the contingent liability footnote disclosure is statistically significant and should be considered in bankruptcy prediction models. ^

Subject Area

Business Administration, Accounting|Economics, Finance

Recommended Citation

Doris Ann (Dori) Lombard, "The effects of strategic bankruptcy and contingent liabilities on the performance of bankruptcy prediction models" (January 1, 1998). ETD Collection for Pace University. Paper AAI9904669.
http://digitalcommons.pace.edu/dissertations/AAI9904669

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