Predicting Bankruptcy in the Pulp and Paper Industry

This paper examines bankruptcies in North American pulp and paper companies that occurred between 1980 and 2006. 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 well established bankruptcy prediction models first developed by Altman (1968) and 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 models on a sample of pulp and paper firms and perform in-sample and out-of-sample forecasts. For the pulp and paper out-of-sample period, 2007-2008, our re-estimated Altman and Ohlson models correctly predict 73% and 95% of bankruptcy and non-bankruptcy outcomes, respectively.