A Multi-period Logistic Model of Bankruptcies in the Manufacturing Industry

This paper analyses with a multi-period logistic model corporate bankruptcy in the manufacturing industry over the period 1980 to 2007. The contribution of this paper to the bankruptcy prediction literature is the concentration on one of the most important industries in the U.S.; the manufacturing industry. In addition, this research includes the effect of the Gross Domestic Product on bankruptcy filings, which turns out to be a powerful predictor. The results show that accounting variables lose predicting power when market driven variables are added. Only one accounting variable (a liquidity ratio) turns out to be statistically significant once market variables are accounted for. This study finds; liquidity of the company, excess return and volatility of the publicly traded shares and macroeconomic growth are significant in predicting bankruptcy in the whole manufacturing industry. In the analysis of the manufacturing sub-industries the excess return of company shares over the S&P500 return is a significant bankruptcy predictor in 7 of the 8 manufacturing sub-industries. GDP is significant in the industrial machinery industry and liquidity is significant in the textile and chemicals industry.