Bankruptcy in the pulp and paper industry: market’s reaction and prediction
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Abstract
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 (1980), we predict
financial distress for pulp and paper firms one to two years ahead of the bankruptcy. We also
adapt and re-estimate the empirical model on a sample of pulp and paper firms and perform insample
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.
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2012-12
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