Predicting Bankruptcy in Private Firms: Towards a Stepwise Regression Procedure

Abstract

The aim of this paper is to investigate the relative importance of various bankruptcy predictors commonly used in the existing literature as well as ad hoc variables by applying a variable selection technique. Based on a sample of 4,796 Belgian private firms, a forward stepwise logistic regression procedure is employed. Our results confirm that lower levels of liquidity, solvency and profitability increase the probability of bankruptcy while younger and smaller firms are more likely to be bankrupt. Furthermore, the proportion of accruals in total assets is negatively related to the probability of failure and improves the accuracy of our model.