The prediction of corporate failures

The prediction of corporate failures has received widespread attention over the past 15 years. Numerous articles on the subject in accounting and financial journals attest to this fact, stating that the failure of a business organization often has significant economic effects for its owners, creditors and employees. Past efforts have been quite successful in classifying firms as bankrupt or non-bankrupt ex-post, but much remains to be done in terms of developing better predictive models. This paper is intended to review the literature and to focus on some problems where research seems likely to yield improved models. It starts with a comprehensive, though not exhaustive, guided tour of the bibliography. It then discusses some recent attempts to improve the effectiveness of these models. Finally it points to some promising areas for future research.