Failure Prediction Models: Performance, Disagreements, And Internal Rating Systems

The authors address a number of comparative issues relating to the performance of failure prediction models for small, private firms. They use two models provided by vendors, a model developed by the National Bank of Belgium, and the Altman Z-score model to investigate model power, the extent of disagreement between models in the ranking of firms, and the design of internal rating systems. They also examine the potential gains from combining the output of multiple models. They find that the power of all four models in predicting bankruptcies is very good at the one-year horizon, even though not all of the models were developed using bankruptcy data and the models use different statistical methodologies.