Paper Title
Predicting Corporate Failures in Jordan

Abstract
We examine the accuracy and contribution of Moody's KMV Corporation’s default forecasting model based on Merton's bond pricing model. We measure the distance-to-default (DtD) of fourteen distressed corporates and predict their failure by calculating each corporate’s probability of default (PD). Using Merton’s model as a predictor of hazard rate, we find that the DtD and PD are very good measures of corporate failure for our sample of corporates in Jordan. PD's predict default accurately in the selected sample and can be used by banks as an early warning signal. Finally, we find that debt to equity and loss ratios are not good predictors of financial bankruptcy and may lead to a judgmental bias. This study shows that reliance on financial ratios alone can be misleading when evaluating the financial viability of a company. For example, we find that capital structure and financial loss-to-firm capital are not good predictors of financial bankruptcy, a result not reported in extant literature. Key words - Hazard model, Merton’s model , Probability of default, Distance to default, Bankruptcy, Judgmental bias. JEL classification: G32; G33