Bankruptcy prediction in Norway: a comparison study

Abstract

In this article we develop statistical models for bankruptcy prediction of Norwegian firms in the limited liability sector using annual balance sheet information. We fit generalized linear, generalized linear mixed and Generalized Additive Models (GAM) in a discrete hazard setting. It is demonstrated that careful examination of the functional relationship between the explanatory variables and the probability of bankruptcy enhances the models' forecasting performance. Using information on the industry sector we model the unobserved heterogeneity between different sectors through an industry‐specific random factor in the generalized linear mixed model. The models developed are shown to outperform the model with Altman's variables.

Acknowledgements

The authors thank Associate Professor Sjur Westgaard at the Department of Industrial Economy and Technology Management, Norwegian University of Science and Technology, for providing the original data set on which the entire work is based. Rada Dakovic and Claudia Czado acknowledge the support of Deutsche Forschungsgemeinschaft (CZ 86/1‐2). Daniel Berg's research is supported by the Norwegian Research Council.

Notes

¹ To construct the variables X ₂ and X ₄ we use the book value instead of market value of equity, as market information is unavailable.