The Bankruptcy Prediction Power of New Entrants

Abstract

This study aims to determine if the number of new entrants provides a useful tool for forecasting the probability of a firm’s liquidation. We assess how the formation of new firms in a firm’s geographical location influences the likelihood of liquidation. Using a sample of 825 non-listed French industrial firms located in small cities, our estimates show that an increase in the number of new industrial firms in a firm’s location has a positive and significant impact on the probability of a firm being liquidated. The emergence of new firms seems to have stronger power in predicting bankruptcy than other financial variables such as leverage or the rate of exports.