A Comparison of the Information Content of Accounting and Market Measures in Distress Prediction

The literature presents a clear divide between the so called market and accounting based approaches to bankruptcy prediction. With this in mind, this paper employs the discrete time hazard model framework of Shumway (2001) to test the information content of both market and accounting based models using Australian data. We …nd that market based models signi…cantly outperformed accounting based models in tests of informational content. With many accounting variables become insigni…cant in a model of bankruptcy already containing market based variables. This paper …nds that hybrid models of corporate bankruptcy, containing both accounting and market based variables signi…cantly outperform either of the standalone models. The implication of this result is that, despite the superior performance of market based measures, accounting ratios still add information to a market based approach and therefore have a place in a well de…ned model of corporate bankruptcy.