Do Structural Constraints of the Industry Matter for Corporate Failure Prediction?

Investment Analysts Journal, Vol. 78, pp. 65–8

38 Pages Posted: 10 Jul 2011 Last revised: 2 Apr 2014

See all articles by Wan-Chien Chiu

Wan-Chien Chiu

Department of Quantitative Finance, National Tsing Hua University

Juan Ignacio Peña

Charles III University of Madrid - Department of Business Administration

Chih-Wei Wang

National Central University - Department of Finance

Date Written: April 2012

Abstract

We hypothesize and find empirical evidence that two structural constraints of the industry are informative in the corporate failure prediction, industry concentration and dependence on customers and suppliers. Using an extensive database on corporate failures and bankruptcies in U.S. market from 1998 to 2009, we find that the probabilities of failure and bankruptcy are significantly higher for firms in highly concentrated industries. The probability of bankruptcy is higher for firms in industries with stronger customer dependency but this factor does not affect failure probabilities. Also in the case of failures the model’s fit is noticeably higher than in the case of bankruptcies.

Keywords: Bankruptcy Prediction, Industry Effects, Market and Accounting Variables

JEL Classification: G32, G33, L00

Suggested Citation

Chiu, Wan-Chien and Peña, Juan Ignacio and Wang, Chih-Wei, Do Structural Constraints of the Industry Matter for Corporate Failure Prediction? (April 2012). Investment Analysts Journal, Vol. 78, pp. 65–8, Available at SSRN: https://ssrn.com/abstract=1882010 or http://dx.doi.org/10.2139/ssrn.1882010

Wan-Chien Chiu (Contact Author)

Department of Quantitative Finance, National Tsing Hua University ( email )

101, Section 2, Kuang-Fu Road
Hsinchu, Taiwan 300
Taiwan

HOME PAGE: http://www.qf.nthu.edu.tw/files/15-1173-119580,c5738-1.php

Juan Ignacio Peña

Charles III University of Madrid - Department of Business Administration ( email )

Calle Madrid 126
Getafe, Madrid, Madrid 28903
Spain
34 91 624 9625 (Phone)
34 91 624 9608 (Fax)

Chih-Wei Wang

National Central University - Department of Finance ( email )

No. 300, Jung-da Rd.
Jung-Li
Taoyuan
Taiwan

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