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More than a Dummy: The Probability of Failure, Survival and Acquisition of Firms in Financial Distress


Thomas Åstebro, HEC Paris, 1 Rue de la Liberation, 78351 Jouy en Josas, France, Tel: +33139677483, Fax: +33139677084, E-mail:


We discuss three methodological issues concerning forecasts of the outcome of financial distress. First, we argue that rather than using a binary model the outcome of financial distress should be modeled using a multinomial specification that distinguishes between failure, survival as going concern, and acquisition. We also argue for a random rather than matched-pair sampling technique to better reflect decision making reality. Finally, we investigate the value of using industry-mean adjusted regressors. We find that the binary bankruptcy model is mis-specified relative to the multinomial model, that the matched sampling technique overstates model accuracy and that industry specific intercepts have better explanatory power than industry-adjusted regressors.

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