In this paper a latent class model (LCM) is applied to estimate corporate bankruptcy and insolvency risk in Australia using a number of financial, market and macro-economic variables and indicators. LCMs represent a significant improvement on traditional techniques such as standard logit and linear discriminant analysis because they relax the highly restrictive IID condition which can distort parameter estimates and potentially undermine predictive accuracy (Jones and Hensher, 2004).
While LCMs are more general (powerful) than standard approaches, they differ from many other non-IID approaches in that they are relatively straight forward to estimate and interpret. In this study we demonstrate the application and interpretation of LCM models based on a large sample of corporate failures in Australia. We also consider the potential of LCMs for future research and practice in this field.Content reserved for CMA Australia members. Please log in to see the content. Your Username is your email address registered with CMA Australia. Your Password is you Member Id Number which starts from either MID/CID. This is printed on your certificate/renewal notice/invoice. You are required to input the full Id including MID/CID. User Name:_________________________ (your email address; e.g. email@example.com)Password: __________________________(your CID or MID number without spaces. e.g CID-003015)If you are having problems, members are requested to contact firstname.lastname@example.org to get log in details.