Predicting financial distress based on the credit cycle index: A two-stage empirical analysis

Bi-Huei Tsai*, Chih Huei Chang

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

7 Scopus citations

Abstract

Predictive models of financial distress are developed using the two-stage method applied to listed Taiwanese firms. Firm-specific financial ratios and market factors are adopted to measure the probability of financial distress based on the discrete-time hazard models of Shumway (2001). The Kim (1999) credit cycle index is further established using macroeconomic factors to determine the cutoff indicator of financial distress. The results demonstrate that performance improves as the distressed cutoff indicators are adjusted according to the credit cycle index in the two-stage models, suggesting that the model effectively predicts financial distress, particularly in emerging markets.

Original languageEnglish
Pages (from-to)67-79
Number of pages13
JournalEmerging Markets Finance and Trade
Volume46
Issue number3
DOIs
StatePublished - 1 May 2010

Keywords

  • Type I error
  • credit risk
  • emerging market
  • logit model

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