Bankruptcy risk model and empirical tests

Podobnik, Boris and Horvatić, Davor and Petersen, Alexander M. and Urošević, Branko and Stanley, H. Eugene (2010) Bankruptcy risk model and empirical tests. Proceedings of the National Academy of Sciences of the United States of America, 107 (43). pp. 18325-18330. ISSN 0027-8424

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We analyze the size dependence and temporal stability of firm bankruptcy risk in the US economy by applying Zipf scaling techniques. We focus on a single risk factor—the debt-to-asset ratio R—in order to study the stability of the Zipf distribution of R over time. We find that the Zipf exponent increases during market crashes, implying that firms go bankrupt with larger values of R. Based on the Zipf analysis, we employ Bayes’s theorem and relate the conditional probability that a bankrupt firm has a ratio R with the conditional probability of bankruptcy for a firm with a given R value. For 2, 737 bankrupt firms, we demonstrate size dependence in assets change during the bankruptcy proceedings. Prepetition firm assets and petition firm assets follow Zipf distributions but with different exponents, meaning that firms with smaller assets adjust their assets more than firms with larger assets during the bankruptcy process. We compare bankrupt firms with nonbankrupt firms by analyzing the assets and liabilities of two large subsets of the US economy: 2, 545 Nasdaq members and 1, 680 New York Stock Exchange (NYSE) members. We find that both assets and liabilities follow a Pareto distribution. The finding is not a trivial consequence of the Zipf scaling relationship of firm size quantified by employees—although the market capitalization of Nasdaq stocks follows a Pareto distribution, the same distribution does not describe NYSE stocks. We propose a coupled Simon model that simultaneously evolves both assets and debt with the possibility of bankruptcy, and we also consider the possibility of firm mergers.

Item Type: Article
Keywords: bankruptcy risk, Simon model, Zipf scaling
Date: 26 October 2010
Subjects: NATURAL SCIENCES > Physics
NATURAL SCIENCES > Physics > Econophysics
Additional Information: © 2010 National Academy of Sciences. Freely available online through the PNAS open access option. Contributed by H. Eugene Stanley, August 18, 2010 (sent for review May 6, 2010). Published online before print on October 11, 2010.
Divisions: Faculty of Science > Department of Physics
Project code: 114-0352827-1370
Publisher: National Academy of Sciences
Depositing User: Davor Horvatić
Date Deposited: 04 May 2016 10:44
Last Modified: 04 May 2016 12:26

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