Predicting Corporate Bankruptcy Risk in Australia: A Latent Class Analysis

In this paper a latent class model (LCM) is applied to estimate corporate bankruptcy and insolvency risk in Australia using a number of financial, market and macro-economic variables and indicators.  LCMs represent a significant improvement on traditional techniques such as standard logit and linear discriminant analysis because they relax the highly restrictive IID condition which can distort parameter estimates and potentially undermine predictive accuracy (Jones and Hensher, 2004).

While LCMs are more general (powerful) than standard approaches, they differ from many other non-IID approaches in that they are relatively straight forward to estimate and interpret.  In this study we demonstrate the application and interpretation of LCM models based on a large sample of corporate failures in Australia. We also consider the potential of LCMs for future research and practice in this field.

Download PDF JAMARv12 1-Predicting Corporate Bankruptcy Risk-v2


About Prof Janek Ratnatunga 1129 Articles
Professor Janek Ratnatunga is CEO of the Institute of Certified Management Accountants. He has held appointments at the University of Melbourne, Monash University and the Australian National University in Australia; and the Universities of Washington, Richmond and Rhode Island in the USA. Prior to his academic career he worked with KPMG.

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