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Creditor coordination effects and bankruptcy prediction

Hyun Ah Lee, 2011
Faculty Advisor: Stephen Penman
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Abstract

This study investigates the increase in forecasting accuracy of hazard rate bankruptcy prediction models with creditor coordination effects over the forecasting period 1990-2009. A firm's probability of bankruptcy is likely to be marginally affected by creditors' coordination behavior, since failure to coordinate may result in premature foreclosure, denial of refinancing, or disagreement over private restructuring. Applying findings from prior literature, I present creditor coordination effects as interactions between the ex ante likelihood of creditor coordination failure and a firm's information characteristics. The most striking finding of this study is an increase, on average, of 10% in the out-of-sample forecasting accuracy of private firm prediction models with creditor coordination effects. The contributions of this study are twofold, (1) the hazard rate model results provide evidence that creditor coordination can exert marginal effects on firms' probability of bankruptcy, and (2) the forecast accuracy results suggest that incorporating creditor coordination effects can significantly improve the forecasting accuracy of bankruptcy prediction models for private firms.

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