An Error Component Logit Analysis of Corporate Bankruptcy and Insolvency Risk in Australia |
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| Authors: | DAVID A. HENSHER STEWART JONES WILLIAM H. GREENE |
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| Affiliation: | Institute of Transport and Logistics Studies (C37), School of Business, Faculty of Economics and Business, University of Sydney, Sydney, New South Wales, Australia; Discipline of Accounting, Faculty of Economics and Business, University of Sydney, Sydney, New South Wales, Australia; Department of Economics, Stern School of Business, New York University, New York, USA |
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| Abstract: | ![]()
This paper introduces a four-state failure model to depict a wider range of distress scenarios that public companies typically face in the real world. We use a multinomial error component logit model to analyse firm failure, a major advance on the modelling techniques used in previous research. The error component logit model, being an extension of the more familiar mixed logit model, relaxes several questionable statistical assumptions associated with standard models. Using a sample of Australian firms we provide an interpretative illustration of the error component logit model and contrast its behavioural performance with the standard logit model widely used in previous research. |
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| Keywords: | G33 |
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