Financial distress prediction with an expanded information set

This study develops five multinomial logit models to classify firms into one of four states of financial health: healthy, bonds downgraded to a "C" rating, bankruptcy protection under Chapter 11, and liquidation. The predictive variables are selected from fourteen accrual accounting ratios and eight broadening variables (cash flow data, dividend data, stock price data, industry data, and economic data). Each of the five models predicts the financial health of firms one, two, and three years in advance. A holdout sample from a different time period is employed to validate the results. The estimation sample and holdout sample consist of over 400 firms each.