The Development of Construction Industry Failure Prediction from Integration of Accounting and Market Stock Price Information
Date Issued
2009
Date
2009
Author(s)
LEE, KUO-YAO
Abstract
The traditional corporation financial failure model is based on accounting information, and it provides different methods, such as single variable analysis, multivariate analysis, logistical regression model, etc. In 1997, Merton develop a company failure prediction based on Black and Scholes’s option price theory, whose concept was to estimate the asset value and its variability by the information of the market stock price and compared with the debt of accounting sheet to obtain the company failure probability. Theoretically, the market stock price is the hypothesis of full response to all the given information, which means the efficient market and the stock’s price is decided by the new random information and represents the random normal distribution. However, the real market is not the same as the theory, so some criticism is existed both base on accounting information and market stock information. The prediction based on accounting information would be strongly influenced because the accounting sheet could be easily manipulated. However, On the other hand, the Merton model based on the information of market price is also under the criticism of market inefficiency and inappropriate assumptions of value distribution.here are 117 contractors as research sample come from the north America in this research. We put the two procedure type of Expected Default Frequency (EDF), as a predicting variable, generated from Merton model, into the traditional logistic regression model. The combination of the two information mentioned above will be applied to predict the corporation financial distress of Construction Industry. We highly expect that we can reach the more precise prediction of corporation distress by combining the accounting with the market price of stocks. According to the result of this research, we can not only tell that Expected Default Frequency variable is significant in the failure prediction but also improve the accuracy of the failurerediction with logistic regression model.
Subjects
financial distress
failure prediction
Construction Industry
Logit model
Merton model
Type
thesis
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