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Prediction of default probability for construction firms using the logit model

Authors :
H. Ping Tserng
Po-Cheng Chen
Wen-Haw Huang
Man Cheng Lei
Quang Hung Tran
Source :
Journal of Civil Engineering and Management, Vol 20, Iss 2 (2014)
Publication Year :
2014
Publisher :
Vilnius Gediminas Technical University, 2014.

Abstract

Recently, the high incidence of construction firm bankruptcies has underlined the importance of forecasting defaults in the construction industry. Early warning systems need to be developed to prevent or avert contractor default; additionally, this evaluation result could facilitate the selection of firms as collaboration or investment partners. Financial statements are considered one of the key basic evaluation tools for demonstrating firm strength. This investigation provides a framework for assessing the probability of construction contractor default based on financial ratios by using the Logit model. A total of 21 ratios, gathered into five financial groups, are utilized to perform univariate logit analysis and multivariate logit analysis for assessing contractor default probability. The empirical results indicate that using multivariate analysis by adding market factor to the liquidity, leverage, activity and profitability factors can increase the accuracy of default prediction more than using only four financial factors. While considering the market factor in the multivariate Logit model, clear incremental prediction performance appears in 1-year evaluation. This study thus suggests that the market factor comprises important information to increase the prediction performance of the model when applied to construction contractors, particularly in short-term evaluation.

Details

Language :
English
ISSN :
13923730 and 18223605
Volume :
20
Issue :
2
Database :
Directory of Open Access Journals
Journal :
Journal of Civil Engineering and Management
Publication Type :
Academic Journal
Accession number :
edsdoj.f84b6b6624ca4812851fd17b7fc64bff
Document Type :
article
Full Text :
https://doi.org/10.3846/13923730.2013.801886