Predicting COVID-19 Related Corporate Bankruptcies Prior to the Pandemic

In a previous study, it was shown that firms approaching bankruptcy exhibited less chaos than pair match firms based on their SIC (standard industry classification) code that did not enter bankruptcy. Chaos can be used to compare systems as quantified by calculating the Lyapunov exponent. In this study, the exponent was calculated using time series of daily stock market returns. Given that unhealthy systems display less chaos than healthy systems, bankruptcy is considered in this study as an expression of an unhealthy system. The sudden emergence of the COVID-19 pandemic placed firms under stress. This study successfully uses the Lyapunov exponents calculated for pair match firms based on the newer NAICS (North American Industry Classification System) code prior to the emergence of the pandemic to predict bankruptcies occurring shortly afterwards.