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The Relationship between Bankruptcy Model Predictions and Stock Market Perceptions of Bankruptcy

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  • Dugan, Michael T
  • Forsyth, Timothy B

Abstract

This study uses a cumulative sum technique to determine the point at which the stock market first perceives that a firm may file for bankruptcy. The study then attempts to identify information, whether from financial statements or from other sources, that may have influenced the market in its reassessment of the firm's prospects. The results indicate that the switching point of the mean and variance of stock returns appears to be related both to financial statement information (as measured by changes in bankruptcy model probability assessments) and the release of unfavorable news in the "Wall Street Journal." Copyright 1995 by MIT Press.

Suggested Citation

  • Dugan, Michael T & Forsyth, Timothy B, 1995. "The Relationship between Bankruptcy Model Predictions and Stock Market Perceptions of Bankruptcy," The Financial Review, Eastern Finance Association, vol. 30(3), pages 507-527, August.
    • Handle: RePEc:bla:finrev:v:30:y:1995:i:3:p:507-27
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    Cited by:

    1. Iqbal, Zahid & Shetty, Shekar, 2002. "Insider trading and stock market perception of bankruptcy," Journal of Economics and Business, Elsevier, vol. 54(5), pages 525-535.
    2. Guragai, Binod, 2022. "Market response to stock exchange listing deficiency notices: Evidence from Nasdaq," Advances in accounting, Elsevier, vol. 59(C).
    3. Idrees, Sahar & Qayyum, Abdul, 2018. "The Impact of Financial Distress Risk on Equity Returns: A Case Study of Non-Financial Firms of Pakistan Stock Exchange," MPRA Paper 85346, University Library of Munich, Germany.
    4. Rassoul Yazdipour & Richard Constand, 2010. "Predicting Firm Failure: A Behavioral Finance Perspective," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 14(3), pages 90-104, Fall.

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