On The Determinants Of Bankruptcy Prediction

Structural credit models formulate the capital structure of the firm and hence have been used widely for predicting bankruptcy. Yet no paper has compared a wide variety of models with a nested set of assumptions. In this paper, the authors consider six models - Merton, Black-Cox, Leland-Toft, Longstaff-Schwartz, flat barrier, and Geske models in a nested framework and examine which key determinants are most important in predicting defaults. Using the past 20 years of data, they find that flexible recovery boundary and multi-period default are important factors while random interest rates is not.