Bankruptcy Prediction: The case of Japanese listed companies

by Ming Xu of the Hong Kong Polytechnic University, and
Chu Zhang of the Hong Kong University of Science & Technology

July 26, 2008

Abstract: This paper investigates if bankruptcy of Japanese listed companies can be predicted using data from 1992 to 2005. We find that the traditional measures, such as Altman's (1968), Ohlson's (1980) and the option pricing theory-based distance-to-default, previously developed for the US market, are also individually useful for the Japanese market. Moreover, the predictive power is substantially enhanced when these measures are combined. Based on the unique Japanese institutional features of main banks and business groups (known as Keiretsu), we construct a new measure that incorporates bank dependence and Keiretsu dependence. The new measure further improves the ability to predict bankruptcy of Japanese listed companies.

JEL Classification: G15, G33.

Keywords: Bankruptcy risk measure, accounting information, option pricing theory, Japanese listed companies, bank dependence, Keiretsu.

Published in: Review of Accounting Studies, Vol. 14, No. 4, (December 2009), pp. 534-558.

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