Bankruptcy Prediction: Theoretical Framework Proposal

Author(s)

Thian Cheng Lim , Lim Xiu Yun , Jessica , Siwei Gan , Haozhe Jiang ,

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Volume 1 - September 2012 (09)

Abstract

Bankruptcy prediction studies lack a strong theoretical framework but were driven by empirical testing and exploration of new econometric models to identify potential bankrupt firms. This paper examines this phenomenon by reviewing existing literatures and proposed a theoretical framework to govern the direction and future development of this area of finance. Liquidity, Profitability and Wealth Theory, Cash Flow Theory, Merton Model, &Gambler’s Ruin Theory were investigated. Liquidity, Profitability and Wealth theory was discovered to be most popular.

Keywords

Bankruptcy prediction, theoretical framework, Merton Model, Gambler’s Ruin

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