Declining revenues in the defense industry may eventually result in bankruptcies. This report considers whether a model could reliably predict defense contractors’ bankruptcy. The authors find that models based on multivariate discriminant analysis or multiple linear regression analysis using financial data from nondefense firms are unlikely to perform well for defense firms. An approach using securities market information also appears unlikely to predict accurately. The authors conclude that subjective methods of pro forma analysis and expert financial judgment remain more promising. However, they suggest that methods unreliable for estimating bankruptcy probabilities might be reliable enough to rank companies according to these probabilities. They also recommend that those attempting to develop objective models consider using bond yields and accounting data as predictor variables.
This report is part of the RAND Corporation monograph report series. The monograph/report was a product of the RAND Corporation from 1993 to 2003. RAND monograph/reports presented major research findings that addressed the challenges facing the public and private sectors. They included executive summaries, technical documentation, and synthesis pieces.
Permission is given to duplicate this electronic document for personal use only, as long as it is unaltered and complete. Copies may not be duplicated for commercial purposes. Unauthorized posting of RAND PDFs to a non-RAND Web site is prohibited. RAND PDFs are protected under copyright law. For information on reprint and linking permissions, please visit the RAND Permissions page.
The RAND Corporation is a nonprofit institution that helps improve policy and decisionmaking through research and analysis. RAND's publications do not necessarily reflect the opinions of its research clients and sponsors.