Trailing Data: A New Frontier in Bankruptcy Prediction

Abstract

Can we predict the risks of bankruptcy more accurately using trend analysis techniques? This study discusses the importance of trend analysis as a new method for financial distress predictions, and the use of trailing data as a statistical method to identify bankruptcy over time. Trailing data is useful because it reveals underlying trends and patterns, smooths out fluctuations in financial metrics, and helps to discriminate between financially healthy firms and those that are failing. This paper proposes a new approach to bankruptcy forecasting by using a 3-year trailing measure expressed in percentages instead of the commonly used snapshot ratios. Financial ratios have been the mainstay of such studies, but this paper seeks to provide a new perspective. The approach involves a descriptive analysis regression on various variables, including the 3-year change of five accounting-based independent variables, along with one market-based independent variable.