Who Saw It Coming?: The Efficacy of Bankruptcy Prediction Models on Private Retail Firms

Sammanfattning: Bankruptcy is never considered a desired outcome, and methods of predicting it have received extensive attention during the past decades. However, as a consequence of weak academic interest and peculiar financial profiles, retail bankruptcy prediction remains rather unexplored. Likewise, the majority of existing bankruptcy prediction models have been developed on publicly listed firms- restricting their applicability to privately held companies. Consequently, there is a gap in bankruptcy prediction for privately held retailers-worsening their ability to signal, capture, and divert financial distress. Our study bridges that gap by analysing the efficacy of a selection of bankruptcy prediction models, both general and retail-specific, to establish which one reigns supreme in predicting bankruptcies for private retail firms. We find that Ohlson's O-score performs best in our sample of over 14,000 Swedish private retail firms. Additionally, we find evidence in the literature and our empirical study to support the use of different sensitivity levels in the models, depending on the use case. Finally, we discuss limitations of our research design and give suggestions for further research.