Decision-making, risk and corporate governance: A critique of methodological issues in bankruptcy/recovery prediction models

摘要

The purpose of this article is to evaluate and critique models of bankruptcy/recovery risk. Almost all existing bankruptcy/recovery prediction models are inaccurate, and given the reliance by government officials, banks, and financial institutions, the international financial system may be compromised. These models were developed using highly questionable methods and data, and are impractical. Risk and decision making are better quantified and modeled using a mix of situation-specific dynamic, quantitative and qualitative factors. Bankruptcy/recovery prediction models don’t incorporate the many psychological, legal, liquidity, knowledge and price-dynamic factors inherent in capital markets, financial distress asset prices and thus, are not useful and accurate in many asset markets, particularly those outside the US and in emerging-markets countries. Bankruptcy/recovery analysis and decision-making are multi-criteria processes that typically require some processing of information, and hence cannot be accurately defined by rigid quantitative models.