An analysis of the determinants of financial distress in Italy: A competing
risks approach
Alessandra Amendola, Marialuisa Restaino, Luca Sensini
PII:
DOI:
Reference:

S1059-0560(14)00174-9
doi: 10.1016/j.iref.2014.10.012
REVECO 990

To appear in:

International Review of Economics and Finance

Received date:
Revised date:
Accepted date:

8 May 2012
29 March 2014
31 October 2014

Please cite this article as: Amendola, A., Restaino, M. & Sensini, L., An analysis of
the determinants of nancial distress in Italy: A competing risks approach, International
Review of Economics and Finance (2014), doi: 10.1016/j.iref.2014.10.012

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An analysis of the determinants of financial distress in

Italy: a competing risks approach
Alessandra Amendolaa , Marialuisa Restainob,, Luca Sensinic
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Department of Economics and Statistics, University of Salerno, Via Giovanni Paolo II,
132 84084 Fisciano (SA), Italy
b
Department of Economics and Statistics, University of Salerno, Via Giovanni Paolo II,
132 84084 Fisciano (SA), Italy
c
Department of Management and Information Technology, University of Salerno, Via
Giovanni Paolo II, 132 84084 Fisciano (SA), Italy

Abstract

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This paper investigates the influence and the effect of micro-economic indicators and firm-specific factors on different states of financial distress. In particular, a competing risks model is estimated taking into account the differences among variables leading firms to exit the market through bankruptcy,
liquidation and inactivity. The determinants of financial distress for any
exit route are identified on the basis of the influence on the hazard ratios of
the significant variables selected for each state. Furthermore, the predictive
performance of the competing-risks model over the single-risk framework is
evaluated, with respect to different time windows, by means of some accuracy
measures. The results reached on a sample of Italian firms provide support
for the hypothesis that the factors influencing firms way out strongly depend
on the exit routes and highlighting the need to distinguish among them by
means of a multiple-state approach.
Keywords: Financial distress, Firms exit, Competing risks model,
Forecasting
JEL Classification: C34, C40, G33, G34

Corresponding author
Email addresses: alamendola@unisa.it (Alessandra Amendola),
mlrestaino@unisa.it (Marialuisa Restaino), lsensini@unisa.it (Luca Sensini)

Preprint submitted to International Review of Economics and Finance November 7, 2014

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1. Introduction

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Modeling firm survival and studying the effect of factors that determine
firms exit are drawing an increasing attention from both academics and
practitioners over the last years. Most of the existing literature treats exit
from the market as a homogeneous event or focuses on only one form of exit,
separately investigating any decision to leave the market. Starting from the
seminal paper of Altman (1968), researchers have essentially focused on the
failing and non-failing dichotomous variable, examining the companies that
actually went bankrupt by means of some models (logit, probit, discriminant
analysis, survival analysis and so on) (Ohlson, 1980; Zmijewski, 1984; Lennox,
1999; Shumway, 2001; Brabazon and Keenan, 2004; Figlewski et al., 2012,
among the others).
However, there are different exit options that may force a potentially
distressed company to leave the business. Besides entering in involuntary
exit procedure (such as bankruptcy), a firm could choose for a merger or
acquisition or decide for a voluntary liquidation. Each type of exit is likely
to be driven by different factors and can determine important implications
for the stakeholders and, in general, for the whole economy (Schary, 1991;
Harhoff et al., 1998). Investigating the determinants leading to the different forms of distressed firms exit can, therefore, be particularly relevant. In order to examine the effects of explanatory variables across the
states of financial distress, a multi-state approach can be used (Headd, 2003;
Jones and Hensher, 2004; Rommer, 2005; Hensher and Jones, 2007; Jones and Hensher,
2007). Some studies analyze the different types of exit, whereas not much is
said about the similarities or dissimilarities among factors determining them
(Chancharat et al., 2010; Esteve-Perez et al., 2010).
The aim of this paper is to give a contribution in this direction studying
the determinants of the probability of alternative exit routes, with particular
attention to the differences in the factors driving firms out of the market. The
effects of micro-economic indicators and firm-specific variables on different
states are examined by a competing risks hazard model. This model is used
for determining the probability and hazard ratio of three mutually exclusive
ways of exit, namely bankruptcy, liquidation and inactivity. The first category includes those firms that involuntary exit the market; the second refers
to firms that opt for a liquidation encouraged by several possible reasons
(avoid involuntary exit, restructuring, etc.). The last category includes those
firms that exit the market for reasons different from the previous ones. The
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active firms are selected as reference group. Unlike discrete outcome models
(logit, probit), hazard models allow to account for both whether and when an
event occurs, by tracking the evolution of the risk over time. Moreover, the
competing risks model provides information regarding whether the effects of
each variable change across the multiple states of financial distress.
Here we develop a four-state Cox proportional hazards competing risks
model, in which the states are considered to be independent. In order to highlight the diverse role played by the explanatory factors, a single-risk model
is also estimated in which all financial distress states are pooled together.
The results obtained by the two model specifications are compared not only
in terms of the significance and sign of the selected variables, but also on
the basis of hazard ratio and financial meaning. A further comparison is
made on the forecasting accuracy evaluating the capability of the models to
predict firms exits by means of some accuracy measures. The analysis have
been carried out on a sample of Italian firms. In particular we refer to the
building sector underlining its relevance not only in terms of relative weight
of GNP, but also with respect to its role in the various objectives behind
national development planning in many European countries.
To perform these approaches and provide empirical evidence, a set of explanatory variables is considered from which selecting the best-set of possible
candidate indicators to be included in the estimated models. To this purpose,
few considerations pointed out in the literature have been taken into account.
Some companies characteristics, such as age and size, affect the probability of
failure. In particular, the likelihood of a firm to go bankrupt decreases with
size and age (Bhattacharjee et al., 2009; Esteve-Perez et al., 2010). Corporate governance, specifically the structure of the firms board of directors and
ownership and the interaction among them, may also affect the probability of
failure. The agency problem between the owners of a firm (its shareholders)
and the management lead to inefficiency in case of ownership concentration
(Zeitun, 2009). The legal form can be also considered as a potential indicator for risk measures. Private limited liability companies would face higher
risk, as they would have less share capital to lose compared with public
limited liability companies (Esteve-Perez et al., 2010). From what concern
the indicators of firms financial performance, we consider the most relevant and effective indicators in highlighting current and prospective conditions of financial distress that refer to the different methodological proposals,
from the pioneer works on the topic (Smith and Winakor, 1930; Fitzpatrick,
1931, 1932) since the more recent contributions (Altman and Hochkiss, 2006;
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Balcaen and Ooghe, 2006; Ravi Kumar and Ravi, 2007; Xie et al., 2008; Amendola et al.,
2011; Laitinen and Suvas, 2013).
To anticipate the results, our findings reveal several differences in the
factors determining firms way out with respect to the exit routes. In particular, we find out that some firm-specific characteristics, such as age, legal
form and size, have influence on the probability of being liquidated, inactive
and bankrupted, thus confirming the empirical results available in literature. The profitability ratios also play a relevant role on the likelihood of
going bankrupt. Then, for the single-risk model the variables selected show
some similarities to those characterized by the inactive state and liquidation,
whereas they are different for bankruptcy. Thus, our results corroborate the
need to separately investigate the different forms of exit, and allow to better
understand the effects of diverse explanatory factors. The method developed
in this paper can be easily applied to data collected from other industries or
countries.
The paper is structured as follows. In the next section, the statistical
method is briefly reported. The predictors dataset is introduced in Sect. 3.
The results are discussed in Sect. 4, while Sect. 5 concludes.
2. Methodology

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The Competing risks model is one of the most popular settings of the
Multi-State Models (for details, see Andersen et al., 1993; Hougaard, 2000;
Andersen et al., 2002). It extends the simple mortality model for survival
data and is based on one transient state (alive state) and a certain number
of absorbing states, corresponding to death from different causes. Thus, all
transitions are from the state alive.
Let T and C be the failure time and the censoring time, respectively.
Let T = min(T, C) be the observed time and let = I(T C) be an
indicator function, which is equal to 1 if the cause of failure is known, and
zero otherwise. Thus, the observed data are given by (T, ).
Let D be the cause of failure (event-causing failure). Assume that the
possible causes are numbered from 1 to K. The main feature of competing
risks model is that from a given set of k causes, one and only one cause can be
assigned to every failure. Analyzing competing risks data means to get insight
the joint distribution of T and D. The fundamental concept in competing
risks model is the cause-specific hazard function, i.e. the probability of failing

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P [T t + t, D = k|T t]
,
t0
t

k = 1, . . . , K.

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k (t) = lim

due to a given cause k, after one has reached the time point t:

(2)

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and the cause-specific survival function is:

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Then, the cumulative cause-specific hazard function is:

Z t
k (t) =
k (s)ds,

(1)

(3)

K
X

(4)

Sk (t) = exp(k (t)).

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Finally, the overall hazard function can be written as:

(t) =

k (t),

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k=1

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Since we are sometimes interested in the probability to fail from cause k

up to time point t, the probabilities as functions of t, called the cause-specific
cumulative incidence functions, can be considered:
(5)

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Ik (t) = P (T t, D = k).

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Cause-specific hazard function and cumulative incidence function point

to a single cause. If we are interested in the relative contribution of the
different causes to the overall failure, we can transform these quantities to
relative measures of the contribution. Thus, the probability to have failed
because of a given cause k and before time t is given by:
Ik (t)
.
Ik (t) = P (D = k|T t) = P
k Ik (t)

(6)

Then, we can consider the probability to fail from cause k, given one will
fail within a short time interval after reaching the time point t, leading to:
k (t)
k = P
,
k k (t)

k = 1, . . . , K.

(7)

Lets assume that 0 < t1 < t2 < < tu are ordered distinct time points
at which failures of any causes occur. Let dkr (r = P
1, . . . , u) denote the number of firms failing from cause k at tr and let dr = K
k=1 dkr denote the total
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number of failures (from any cause) at tr . In the absence of ties, only one of
the dkr equals 1 for a given r and dr = 1. Let nr be the number of firms at
risk (i.e. firms that are still in follow-up and have not failed from any cause)
at time tr .
Consider a discretized version of the cause-specific hazard, i.e. the proportion of subjects at risk that fail from cause k:
k (tr ) = P (T = tr , D = k|T > tr1 ).

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It would be estimated by:

(9)

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bk (tr ) = dkr ,

nr

(8)

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for k = 1, . . . , K and for r = 1, . . . , u.

Since the cause-specific hazards are identifiable, a regression on them is
possible. In Proportional Hazards Regression, the cause-specific hazard of
cause k for a subject i with covariate vector Zi is given by:
(10)

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ik (t|Zik ) = k,0 (t) exp{ Tk Zik (t)},

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where k,0 (t) is the baseline cause-specific hazard of cause k which does not
need to be explicitly specified, Zik (t) is a vector of covariates for firm i specific
to k-type hazard at time t, and the vector k represents the covariate effects
on cause k to be estimated. Since the same variables could have different
effects on the different risks, it is reasonable to assume that, for each k, k
is independent of each other.
In order to have an estimate of the coefficients vector, we build the partial
likelihood function for each specific hazard k using the results available in
univariate Cox Proportional Hazard model:
nk
Y
exp{ Tk Zik (t)}
Lk ( k ) =
P
T
lR(tik ) k Zlk (t)
i=1

(11)

where nk is the number of firms in specific hazard k, and R(tik ) = {l|tlk tik }
is the set of individuals at risk at time tik .
The overall partial likelihood function is given by:
nk
K Y
Y
exp{ Tk Zik (t)}
L( 1 , . . . , k ) =
P
T
lR(tik ) k Zlk (t)
k=1 i=1

(12)

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3. The data

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The data refer to the population of Italian firms that operate in the building sector1 in the period 2004-2009. The information on individual firms
and their financial characteristics have been obtained from the Amadeus
database, provided by Bureau van Dijk. Our main interest is in investigating
the determinants of firms that end up in financial distress and compare these
determinants for each different form of exit. The focus is on three mutually
exclusive states of exit from the market: bankruptcy, liquidation and inactivity. The bankrupt status includes those firms that have been legally declared
not to be able to pay its creditors and are under a Court supervision. The
second status includes those companies that no longer exists because they
have ceased their activities and are in the process of liquidation. The last
state includes those firms that exit the database, but it is unknown the reason of the exit. The reference group is given by active firms. From the overall
population of active and non-active firms, we select a cluster random sample
of n = 1462 firms based on the geographical distribution of the industrial
firms across the regions. The distribution of the final sample consists of 221
companies that went bankrupt, 129 that had entered voluntary liquidation,
and 228 that were inactive. The companies in the active state are 884.
The predictors data-base for the years of interest (2004-2009) is elaborated starting from the financial statements of each firm included in the sample, for a total of 8030 balance sheets. In particular, we compute nv = 24 indicators selected as potential predictors among the most relevant in highlighting current and prospective conditions of financial distress (Dimitras et al.,
1996; Altman and Hochkiss, 2006). The selected indicators reflect the main
aspects of the firms structure such as profitability, solvency and liquidity.
The specifications of the financial indicators included in the analysis are
are shown in Table 1. Non-financial information on the corporate governance such as region, legal form, number of shareholders, presence of auditors
board, firm size and firm age, are also considered.
A pre-processing procedure is performed on the original data set. The
results of exploratory data analysis indicate that there are some accounting data observations which are severe outliers. These observations would
1

Following part of the literature, the analysis is focused on a specific economic sector
and, as state in the Introduction, we refer to the building sector given its relevance not only
in terms of relative weight of GNP but also in terms of socio-economic policy implications.

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Indicators

Profitability

PM = (PBT/OR)100
EBITDA = R E(EITDA)
EBIT= R - E - DA
CF/OR
ROE = EA / SE
ROCE = RBIT /CE.
ROA = NI/TA
ROTA= (NI + IE + T) / TNA

Operational

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Area

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Table 1: Specification of financial predictors.

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Structure

Firm-specific variables 6

NAT = OR/(SF + NCL)

IC = OP / IP
ST = OR / STO
COP = (D/OR)*360
CRP = (C/OR)*360
CR = CA/CL
LR = (CA - STO)/CL
SLR = SF/NCL
SR = (SF/TA)*100
GE = ((NCL+LO)/SF)*100
Region, Legal Form, Number of
shareholders, Auditors Board,
Firm Size and Firm Age.

C=Creditors; CA=Current assets; CE=Capital Employed; CF=Cash flow; CL=Current liabilities;

COP=Collection period; CR=Current ratio; CRP=Credit period; D=Debtors; DA=Depreciation &
Amortization; E=Expense; EA=Earnings; EBIT=Earnings Before Interest and Tax; EBITDA=Earnings
Before Interest, Taxes, Depreciation and Amortization; EITDA= excluding interest, taxes, depreciation
and amortization; GE=Gearing; IC=Interest cover; IE=Interest Expense; IP= Interest paid; LO=Loans;
LR=Liquidity ratio; NAT=Net assets turnover; NCL=Non current liabilities; NI=Net Income; OP =
Operating profit; OR=Operating revenue; PBT=Profit before tax; PM=Profit margin; R=Revenue;
RBIT=Return (before Interest and Tax); ROA=Return on Assets; ROCE=Return on Capital employed;
ROE=Return on Equity; ROTA=Return on Total Assets; SE=Shareholders Equity; SF=Shareholders
funds; SLR = Shareholders liquidity ratio; SR = Solvency ratio; ST=Stock turnover; STO=Stock;
T=Taxes; TA=Total Assets; TNA=Total Net Asset.

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4. Empirical findings

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seriously distort the estimation results if they were included in the default
risk model. Therefore, those firms showing values of the financial predictors
outside the 3th and 97th percentiles are excluded from the analysis. In order
to achieve stability, we apply a modified logarithmic transformation, defined
for non-positive argument.
Finally, the sample is divided into two parts: in-sample set, used for the
classification ability, in order to determine how accurately a model classified
businesses, and out-of-sample, used for prediction ability, in order to determine how accurately a model classified new businesses. Two predictions
windows are considered: 1-year ahead and 2-years ahead.

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4.1. The determinants of different exit routes

This section provides the empirical results obtained from the estimated
single-risk and competing risks models. The effect of some strategic factors
on the likelihood of exiting the market for different reasons are investigated
and the determinants of various exit routes are compared.
To better understand the effects of the explanatory variables used in our
analysis, we consider a non-parametric test, the Log-rank test (Kalbfleisch and Prentice,
2002), for testing the equality of hazard functions across groups of firms, according to some explanatory variables. This test is considered as a starting
point in order to check which variables have an effect on each exit route
and whether some differences arise not only between the single-risk (where
all states of financial distress are pooled together) and the competing risks
models, but also among the different exit routes.
Table 2 shows the p-values of the log-rank test, for single-risk model (column 5) and for the three competing events (columns 2-4) for 1-year ahead
predictions2 .
Regarding the risk of exiting the market, the test results show that there
are significant differences in the hazard rates between groups for most of the
variables, looking at both the competing risks and the single-risk models.
Considering the different competing events, some variables are significant
for all the three status. Namely, the legal form, the firm size, the first and
2

Although the test is performed for both time-windows (1-year ahead and 2-year ahead),
here we only report the results of the first period considered.

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Liquidation

Single-risk

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Inactive

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Limited Company
One Shareholder
Micro Firmsa
Small Firms
Medium Firms
Large Firms
Age1b
Age2
Age3
Age4
Age5
North
Center
South
Return on total assets
Profit margin
EBITDA
EBIT
Cash flow/Operating revenue
ROE
ROA
ROCE
Net assets turnover
Interest cover
Stock turnover
Collection period
Credit period
Current ratio
Liquidity ratio
Shareholders liquidity ratio
Solvency ratio
Gearing

Bankruptcy

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Table 2: Log-Rank Test for the equality of hazard functions of different exit routes, by
explanatory variables, for 1 year ahead.

The levels of significance are: 0.0001, 0.001, 0.01, 0.05, . 0.10, 1.00.
a

For the firms size, the European classification is used. Micro firms are those having a number of workers
less than 10 and sales less than 2 milions; small firms are those having a number of workers between 11
and 50 and sales between 2 and 10 milions; medium firms are those having a number of workers between
51 and 250 and sales between 10 and 50 millions; large firms are those having a number of workers greater
than 350 and sales greater than 50 millions.
b The age of firms is classified into 5 classes: 1) up to 7 years; 2) from 8 to 13 years; 3) from 14 to 21
years; 4) from 22 to 30 years; 5) more than 30 years.

the last categories of firm age, EBITDA, EBIT, credit period and gearing are
significant for all exit routes with a p-value less than 0.05. The remaining
variables have a different effect in bankruptcy, inactivity and liquidation. For
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example, the number of shareholder and the ROCE are only significant for
the inactive state; the stock turnover and the liquidity ratio are important
only for the bankruptcy; the second and the fourth groups of the age and
the firms being in Northern Italy are relevant only for the liquidation state.
Therefore, it came up there are some differences in variables influencing each
exit and we cannot neglect them when predicting the probability of dropping
out. Moreover, as expected, these results suggest that bankruptcy, inactive
state and liquidation are three rather different events.
Looking at the results for the risk of pooled exits, it can be noted that
the variables relevant for some states in the competing risks model are also
significant for the single-risk model. In particular, the results are in line with
those regarding the risk of being inactive and liquidated, but they diverge
for the risk of being bankrupted.
The variables which are significant by the log-rank test are considered as
the initial set of explanatory variables in the model, in order to assess their
effect on the hazard rate of each exit route. The final set of variables to be
included in each state is further selected by stepwise procedure3 . The results
for the estimated competing-risks and single-risk models are shown in Tables
3 and 4. They respectively display the sign of the coefficients estimates and
the hazard ratios , obtained by computing the exponential of coefficients .
The hazard ratios attest the effect of the covariates on the hazard. A hazard
ratio equal to one means that the variable has no effect on survival, whereas
a hazard ratio greater (less) than one indicates that the effect of the covariate
is to increase (decrease) the hazard rate.
In Table 3, columns 3-5 report the results for the three risks considered
and the last column displays the results for the pooled model. The regression results show some remarkable differences supporting the need to use the
competing risk model over the single risk one. Moreover, the variables are
different in the determinants of the three exit routes and in their sign, not
only between the competing risks and single-risk models, but also among the
states. In particular, looking at the different exit routes, we notice that the
legal form has a positive effect on being bankrupted and liquidated. The
medium size and the last category of age (more than 30 years) have a negative effect on being inactive and liquidated. The first category of age (up to
7 years) has a positive coefficient for bankruptcy and inactive states. Finally,
3

For a discussion on the variable selection problem, see Amendola et al. (2011).

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gearing has a different sign for inactivity and bankruptcy. In fact, it has a
negative impact on the probability of being inactive, while it has a positive
impact on the probability of going bankrupt.
Some of the variables are selected as potential predictors of exit for only
one state. Actually, the geographical division, the number of shareholders,
the profit margin and the collection period are relevant for being inactive.
Then the size, the profitability ratios, the interest cover and the current ratio
are selected as potential predictors of going bankrupt. Significant variables
for being liquidated are the third group of age (from 22 to 30 years), return
on total assets, net assets turnover, credit period and solvency ratio.
To sum up, the main difference among the competing risks is related to
the role of the profitability ratios, which are only selected as predictors of
bankruptcy. The reason may be related to their nature of assessing the firms
ability of generating earnings as compared to its expenses and other relevant
costs incurred during a specific period of time. In other words, they measure the companys use of its assets and control of its expenses to generate
an acceptable rate of return. Consequently, since the inactive state includes
firms for which the cause of exit is unknown, we do not have any information
about their activity.
The effect of the financial ratios and the firm-specific variables can be
further explored by examining the hazard ratios (Table 4).
It can be noted that the limited companies have a greater probability
of being liquidated and going bankrupt. In fact, there is an increase in the
risk of liquidation and bankruptcy, as compared to the firms having other
legal forms. Regarding the dimension of firms and controlling for other firms
characteristics, we note that the risk of being bankrupted is higher for small
firms, while the risk of being liquidated and inactive is lower for medium sized
firms. Moreover, young firms have a higher probability of going bankrupt or
becoming inactive. On the contrary, old firms have a lower probability of
being liquidated and becoming inactive. Then, the effect of the number of
shareholder is to increase the hazard rate of being inactive.
As concerns the financial indicators of profitability area selected as potential predictors of bankruptcy state, they have a negative effect on the hazard
rate, except for the ROCE. The different sign may be related to the fact that
the ROCE includes debt funds like loans and preference capital.
Finally, it results that the variables in single-risk framework are substantially different from those in competing risks model. In particular, very small
companies have a faster hazard timing of exit the market, as opposite to big
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Bankruptcy

Inactive

Positive

Single-Risk

Positive

Positive

Negative

Positive
Positive

NU

Positive

Negative

Negative

Negative
Negative
Negative

Positive
Negative
Negative
Positive
Positive
Negative

Positive

Negative
Negative
Negative
Positive

Positive

Positive
Negative

Negative

Negative

ED

Negative
Negative

Negative

Negative
Negative
Positive
Negative
Negative
Profitability ratios, Operational ratios, Structure ratios and
Negative

CE

PT

Liquidation

Negative
Positive
Positive

MA

Limited Company
4
South Italy
4
Micro Firms
4
Small Firms
4
Medium Firms
4
Large Firms
4
One Shareholder
4
Age1
4
Age4
4
Age5
4
Return on total assets
1
Profit margin
1
EBIT
1
Cash flow/Operating revenue 1
ROE
1
ROCE
1
Net assets turnover
2
Interest cover
2
Collection period
2
Credit period
2
Current ratio
3
Shareholders liquidity ratio
3
Solvency ratio
3
Gearing
3
a : The numbers from 1 to 4 refer to the
firm-specific variables, respectively.

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Areaa

Variables

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Table 3: Sign of Coefficients Estimates for the competing risks and the single risk models,
for 1 year ahead.

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ones. Moreover, the young firms have a higher probability of leaving the market, compared to the older ones. Then, other important characteristics that
determine an increase of the hazard rate are the legal form and the number
of shareholders. Furthermore, it is important to notice that the profitability
ratios are not selected as potential predictors in single-risk, as shown before.
The results confirm most of the main theoretical hypothesis set up in the
default risk models and are mainly in line with those found in the empirical
literature (Rommer, 2005; Belovary et al., 2007; Esteve-Perez et al., 2010).
4.2. Predictive performance
After selecting the most relevant variables for the competing events and
the single risk, we evaluate the predictive performance of the developed models by means of some accuracy measures. Firstly, we compute the type I error,
i.e. a failing firm is misclassified as a non-failing firm, and the type II error,
i.e. a non-failing firm is wrongly assigned to the failing group. Then, as total
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Area

Bankruptcy

Limited Company
South Italy
Micro Firms
Small Firms
Medium Firms
Large Firms
One Shareholder
Age1
Age4
Age5
Return on total assets
Profit margin
EBIT
Cash flow/Operating revenue
ROE
ROCE
Net assets turnover
Interest cover
Collection period
Credit period
Current ratio
Shareholders liquidity ratio
Solvency ratio
Gearing

4
4
4
4
4
4
4
4
4
4
1
1
1
1
1
1
2
2
2
2
3
3
3
3

2.0158

Liquidation
3.5913

0.5328
71.8679
7.0732

SC

0.1030

0.2193

2.2712
1.4888

NU

1.6327

0.4576

0.3312
0.3862
0.8643

Single-Risk
2.0340
2.8020
0.1421
0.2677
1.5049
1.4769
0.5702

1.0795

MA

0.8752
0.7466
0.9164
1.1457

1.2245

1.1535
0.8942

0.8632

0.9475

0.7292

0.8986
0.8871
0.8994

0.8187

0.8036

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PT

Inactive

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Variables

Table 4: Hazard Ratios for the competing risks and the single risk model, for 1 year ahead.

0.4602

1.2187

0.9013

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misclassification error, we consider the Miss-Classification errors (type I and

II), the Area under the ROC curve (AUC) and the Accuracy Ratio (AR)
(Engelmann et al., 2003). These measures are displayed in Tables 5 and 6
for in-sample and out-of-sample sets with respect to the two time-windows
(1-year ahead and 2-years ahead). Looking at the in-sample set, used for
testing the classification ability of the models, it can be noted that the correct classification rate is slightly higher for bankruptcy and liquidation than
the single-risk and it does not increase at approaching the year of exit, while
the inactive states rate is lower than the one of both the other two states
and pooled model. Moreover, the AUC, which considers the impact of the
I and II type errors, has a very discriminative power for bankruptcy and
liquidation, compared to the single-risk framework, and its power increases
as the failure time is approaching.
For evaluating the predictive power of the models, we also compute the
above-mentioned measures on the out-of-sample set. Looking at the results
displayed in Table 6, we notice that even though the correct classification

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rate is higher for the single-risk model than for the other three states, the
competing risks model has a better performance than the single-risk framework in terms of AUC. Therefore, we can conclude that the competing-risks
model produce an improvement for predicting the failure of firm.

Bankruptcy

SC

Table 5: Accuracy measures for in-sample.

Inactive

Liquidation

Single-Risk

2004-2008

0.33213
0.33596
0.14634
0.84980
0.69961

NU

MissClassification
Error II
Error I
AUC
AR

0.42363
0.42881
0.16552
0.76163
0.52326

MA

0.38683
0.39492
0.02484
0.91090
0.82180

PT

ED

MissClassification
Error II
Error I
AUC
AR

0.40703
0.40885
0.26316
0.74844
0.49689

0.39823
0.40173
0.09524
0.84261
0.68522

0.39864
0.41319
0.13846
0.80605
0.61211

2004-2007
0.37943
0.38130
0.05714
0.81609
0.63217

0.40719
0.41835
0.12821
0.81837
0.63674

Table 6: Accuracy measures for out-of-sample.

CE

Bankruptcy

Inactive

Single-Risk

2009

MissClassification
Error II
Error I
AUC
AR

0.25113
0.25227
0.00000
0.89930
0.79859

0.29624
0.29892
0.18750
0.79488
0.58975

MissClassification
Error II
Error I
AUC
AR

0.27970
0.27795
0.66667
0.58258
0.16516

0.25564
0.25116
0.43750
0.76714
0.53428

AC

Liquidation
0.21955
0.21782
0.23729
0.86435
0.72870

0.22105
0.22147
0.21795
0.83672
0.67344

2008-2009
0.20000
0.19142
0.28814
0.83812
0.67623

0.21053
0.19761
0.30769
0.82606
0.65212

5. Conclusions
In this study the competing risks model was estimated for investigating the differences and the effects of potential predictors on the probability
of firms exit the market for different reasons and it was compared to the
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single-risk model, in which all financial distress states are pooled together.
A dataset of financial statements of a sample of Italian firms was analyzed
and three different exit routes were considered: bankruptcy, liquidation and
inactivity. The starting point was to test the significance level of the microeconomic and firm-specific variables on all the three states by means of the
log-rank test. Then, the variables influencing the exit route were selected by
the stepwise procedure. After that, we analyzed the sign and the influence
of the estimated coefficients on each exit route and evaluated the predictive
performance of the competing-risks model over the single-risk framework, at
two time horizons, by considering some accuracy measures.
The results discovered some differences in firm-specific variables and microeconomic factors determining firm exit with respect to the different routes.
In particular, we found out that some firm-specific characteristics, such as
age, legal form and size influence the probability of being liquidated, inactive and bankrupted, confirming the empirical results available in literature.
Moreover, it can be noted the important role of the profitability ratios on
the likelihood of going bankrupt. Then, for the single-risk model the variables selected are quite similar to those characterizing the inactive state and
liquidation, while they are different for bankruptcy. Therefore, our results
gave evidence in favor of distinguishing among bankruptcy, inactivity and
liquidation as three different forms of exit and give ground for the use of
multiple-state models. Further research could include the development of
more appropriate procedure of selecting the variables in the competing risks
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Research Highlights

We investigate the effects of some variables on different states of financial distress.

We estimate a competing risks model on a sample of Italian firms in the period 2004-2009.

Some differences in variables influencing firms exit have been found.

The performance of the competing-risks model is higher than that of the single-risk framework.

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