Comparison Of Predicting Financial Distress Using Hazard Model Without And Incorporating Macroeconomic Variable As Baseline Hazard Rate

Denissa Satriavi
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Denissa Satriavi: Department of Management and Business, Padjadjaran University

No 201105, Working Papers in Business, Management and Finance from Department of Management and Business, Padjadjaran University

Abstract: Hazard model was argued having advantages compared with previous financial distress prediction model because it can produce consistent and accurate estimates. In use, hazard model can include a form of macro-dependencies e.g. macroeconomic variables to capture the effects of the changes of macroeconomics, that have equal value for each sample, to the probability of financial distress, especially in times of crisis or economic recession. By using 95 samples and 40 hold-out sample of Indonesian firms listed in IDX on three industries (agribusiness, mining, and manufacturing) during the years 2000-2009, this study aims to determine what type of hazard model that most suitable applied to predict financial distress on crisis period in the economic climate such as Indonesia. The case of crisis study here is global financial crisis of 2008. Net income to total assets and working capital to total assets jointly built the ordinary hazards models. Working capital to total assets, losses its significance on hazards models that incorporating macroeconomic variables as baseline hazard rate. The results of this study indicate that the hazard model with macroeconomic variables as the baseline hazard rate is not always deliver a higher level of accuracy than the ordinary hazards models even in period of crisis. This can be a suggestion, that it is better first to analyze the magnitude of crisis’s impact on the of the economic foundations of a country. This is because, if the economy remains strong foundation, then the macroeconomic changes will have a little impact on a company's financial condition, particularly the real sector. The effects of crises on the company's financial health conditions more lead to indirect effects, rather than direct effects caused by changes in macroeconomic indicators as well.

Keywords: model; financial ratio; macroeconomic variable; crisis (search for similar items in EconPapers)
JEL-codes: E0 M0 (search for similar items in EconPapers)
Pages: 14 pages
Date: 2011-12, Revised 2011-12
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