Encyclopedia of Finance

2013 Edition
| Editors: Cheng-Few Lee, Alice C. Lee

Corporate Failure: Definitions, Methods, and Failure Prediction Models

  • Jenifer Piesse
  • Cheng-Few Lee
  • Hsien-Chang Kuo
  • Lin Lin
Reference work entry
DOI: https://doi.org/10.1007/978-1-4614-5360-4_23

Abstract

The exposure of a number of serious financial frauds in high-performing listed companies during the past couple of years has motivated investors to move their funds to more reputable accounting firms and investment institutions. Clearly, bankruptcy, or corporate failure or insolvency, resulting in huge losses has made investors wary of the lack of transparency and the increased risk of financial loss. This article provides definitions of terms related to bankruptcy and describes common models of bankruptcy prediction that may allay the fears of investors and reduce uncertainty. In particular, it will show that a firm filing for corporate insolvency does not necessarily mean a failure to pay off its financial obligations when they mature. An appropriate risk-monitoring system, based on well-developed failure prediction models, is crucial to several parties in the investment community to ensure a sound financial future for clients and firms alike.

Keywords

Bankruptcy Conditional Probability Analysis (CPA) Corporate failure Discriminant Analysis (DA) Distress Failure prediction Hazard models Liquidation Misclassification cost models Receivership 
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Notes

Acknowledgements

We would like to thank many friends in University of London (U.K.) and National Chi Nan University (Taiwan) for valuable comments. We also want to thank our research assistant Chiu-mei Huang for preparing the manuscript and proofreading several drafts of the manuscript. Last, but not least, special thanks go to the Executive Editorial Board of the Encylopedia in Finance in Springer, who expertly managed the development process and superbly turned our final manuscript into a finished product.

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Copyright information

© Springer Science+Business Media New York 2013

Authors and Affiliations

  • Jenifer Piesse
    • 1
  • Cheng-Few Lee
    • 2
    • 3
  • Hsien-Chang Kuo
    • 4
  • Lin Lin
    • 4
  1. 1.University of LondonLondonEngland, UK
  2. 2.National Chiao Tung UniversityHsinchuChina
  3. 3.Rutgers Business SchoolRutgers UniversityNew BrunswickUSA
  4. 4.National Chi-Nan UniversityNantouRepublic of China