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

Title: Bankruptcy in the Pulp and Paper Industry: Market's Reaction and Prediction
Format: Journal Article
Publication Date: December 2013
Description:

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, we predict financial distress for pulp and paper firms 1 to 2 years ahead of the bankruptcy. We also adapt and re-estimate the empirical model on a sample of pulp and paper firms and perform in-sample 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.

Ivan Allen College Contributors:
External Contributors: Chun-Yu Ho, Yi Yang, Xuan Ye
Citation:

Ho, Chun-Yu, Patrick McCarthy, Yi Yang, and Xuan Ye. "Bankruptcy in the Pulp and Paper Industry: Market's Reaction and Prediction." Empirical Economics 45.3 (2013):  1205-1232.

Related Departments:
  • School of Economics