Bankruptcy in the Pulp and Paper Industry: Market’s Reaction & Prediction

This paper examines North American pulp and paper company bankruptcies that occurred between 1990 and 2009. We demonstrate that shareholders suffer substantial losses (37%) during the month a bankruptcy occurs. Encouragingly, we show that financial ratios are useful in predicting firm failure and that failed firms are less profitable, more liquidity constrained and higher in debt leverage. Using a binary logit model in the spirit of Ohlson (1980), we predict financial distress for pulp and paper firms one to two years ahead of the bankruptcy. We also adapt and re-estimate the empirical model on a sample of pulp and paper firms and perform insample and out-of-sample forecasts. For the out-of-sample analysis, our re-estimated Ohlson models correctly predict 93% of bankruptcy and non-bankruptcy outcomes. Final Submission: 9 September 2012