Predicting the Lifespan of a Company: An Important Factor for Capital Reallocation

In this paper, the authors will attempt to estimate the expected value of the percentage of the companies that currently have a credit rating and that will go bankrupt after a certain period of time. The authors applied the method of simulation, i.e. the transition matrix of a Markov chain, using as relevant data information on the credit ratings of open joint-stock companies listed on the S&P 500 Index. Research results suggest that the most likely situation is that half of those companies with a CCC (C) credit rating will cease operations after only four years; that is, they will lose their credit rating and will be replaced by some other, more prosperous companies.