Comparing three different models for financial distress

The study of financial distress is part of the domain of finance, and within that, capital structure. As has become widely known by the current financial crisis, financial markets are far from perfect. Therefore the theory stating that a firm’s capital structure is of no relevance to the firm’s valuation as stated in Modigliani and Miller (1958) – which is a factor affected by financial distress as argued by Pindado et al. (2008) – is to be considered inapplicable in practice. Thus this research paper is to examine the reliability in prediction power of three existing financial distress models. Doing so would allow any findings from employing these three very different models to be placed into an existing theoretical framework – that of capital structure, that is – and therefore yield relevant insights into the use, accuracy and relevance of aforementioned financial distress models.