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Updated: Jun 8, 2026
05:37
An R-Based Landscape Validation of a Competing Risk Model
Published on: September 16, 2022
Bankruptcy risk model and empirical tests.
Boris Podobnik1, Davor Horvatic, Alexander M Petersen
1Center for Polymer Studies and Department of Physics, Boston University, Boston, MA 02215, USA. bp@phy.hr
Summary
Firm bankruptcy risk in the US is analyzed using Zipf scaling. During market crashes, bankruptcy risk increases with higher debt-to-asset ratios, and smaller firms adjust assets more during bankruptcy proceedings.
Area of Science:
- Economics
- Quantitative Finance
- Statistical Physics
Background:
- Firm bankruptcy risk is a critical aspect of economic stability.
- Understanding the size dependence and temporal dynamics of bankruptcy risk is essential for financial markets.
- Previous studies often overlook the interplay between firm size, debt, and bankruptcy dynamics.
Purpose of the Study:
- To analyze the size dependence and temporal stability of firm bankruptcy risk in the US economy.
- To investigate the role of the debt-to-asset ratio (R) in bankruptcy risk.
- To model firm bankruptcy and mergers using a coupled Simon model.
Main Methods:
- Application of Zipf scaling techniques to analyze firm bankruptcy data.
- Utilizing Bayes's theorem to relate bankruptcy probability with the debt-to-asset ratio.
- Analysis of assets and liabilities distributions for bankrupt and non-bankrupt firms (Nasdaq and NYSE members).
Main Results:
- The Zipf exponent for the debt-to-asset ratio increases during market crashes, indicating higher bankruptcy risk with larger R values.
- Smaller firms exhibit greater asset adjustments during bankruptcy proceedings compared to larger firms.
- Both assets and liabilities of bankrupt and non-bankrupt firms follow a Pareto distribution, with variations in market capitalization distributions between Nasdaq and NYSE stocks.
Conclusions:
- Firm bankruptcy risk exhibits size dependence and temporal instability, particularly influenced by the debt-to-asset ratio during market downturns.
- The study provides a quantitative framework for understanding bankruptcy dynamics and asset adjustments.
- A coupled Simon model is proposed to simulate firm bankruptcy and merger processes, offering insights into economic system evolution.
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