Modelling corporate failure: A multinomial nested logit analysis for unordered outcomes |
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| Affiliation: | 1. Faculty of Economics and Business, University of Indonesia, Depok 16424, Indonesia;2. IIUM Institute of Islamic Banking and Finance, International Islamic University, Kuala Lumpur Campus, 205A Jalan Damansara, Damansara Heights, 50480 Kuala Lumpur, Malaysia;3. Islamic Research and Training Institute, Islamic Development Bank, Jeddah, Saudi Arabia;4. Kulliyyah of Information, Communication and Technology, International Islamic University Malaysia, Jalan Gombak, 53100 Kuala Lumpur, Selangor, Malaysia |
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| Abstract: | This study evaluates the theoretical and empirical significance of the multinomial nested logit (NL) model as an advanced closed-form model for the explanation and prediction of firm financial distress. Using a four-state failure model based on Australian company samples, we estimate an NL model and test its predictive performance on a holdout sample. Comparison of model fits and out-of-sample forecasts indicate that the unordered NL model statistically outperforms a standard logit model by substantial margins. NL may even be used as an effective practical alternative to more advanced open-form models such as mixed logit in the modelling of firm financial distress. |
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