The Impact of Equity Misvaluation on Predictive
Accuracy of Bankruptcy Models

Abstract

This article examines the impact of equity misvaluation on the predictive accuracy of bankruptcy models. The authors find that structural bankruptcy prediction models are not affected by misvaluation. For hazard models, however, forecasting accuracy for properly valued firms is greater than for misvalued firms, and model forecasting accuracy improves significantly if model coefficients vary with misvaluation. The results show the importance of taking stock market misvaluation into account when forecasting bankruptcies using hazard models.

TOPICS: Security analysis and valuation, risk management, quantitative methods