Corporate Failure and the Predictive Ability of Early Warning Systems: An Empirical Study

• In Event: 4.03 Corporate Failure and Fraud Risk

Abstract

The economic and social cost of business failure is undoubtedly relevant and the usefulness of reliable predictive models is still a priority. To compare the reliability of different models, first, we tested the predictive ability of static alert indicators using a large sample of Italian (nonlisted) companies. Second, we hypothesized a “dynamic” version of the same indicators.
The results provided by our study demonstrate the existence of a trade-off between predictive ability and timeliness for static models. In contrast, a dynamic system is significantly more accurate in predicting crisis events, allowing managers to take effective corrective actions.

Authors

• Mario Daniele, Università Cattolica del Sacro Cuore

• Elisa Raoli, Università Cattolica del Sacro Cuore