| INTRODUCTION 2 MEASURING FINANCIAL HEALTH
| |
| | measures of profitability or risk. The
|
| 2 FINANCIAL DISTRESS 2 FACTORS AFFECTING
| |
| | resulting model was one that demonstrated
|
| FINANCIAL HEALTH 3 Capital Structure and
| |
| | a company's risk of bankruptcy relative
|
| Capital Adequacy 3 Operating Cash Flows
| |
| | to a standard. Altman's initial study
|
| and Cost Structure 4 Earnings Capacity 4
| |
| | proved his model to be very accurate; it
|
| Liquidity 4 Asset Conversions - "Growing
| |
| | correctly predicted bankruptcy in 94% of
|
| Broke" 5 Asset Utilisation Efficiency
| |
| | the initial sample (Altman 1968). Despite
|
| Turnover 5 Strategic Position 5
| |
| | the positive results of his study,
|
| PREDICTING FINANCIAL DISTRESS 6 FAILURE
| |
| | Altman's model had a key weakness; it
|
| PREDICTION MODELS 7 Altman's Z Score 8
| |
| | assumed variables in the sample data to
|
| Logit Analysis: The Model 9 Other
| |
| | be normally distributed. If all variables
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| Statistical Failure Prediction Models 10
| |
| | are not normally distributed, the methods
|
| The Gambler's Ruin Models 10 Alternative
| |
| | employed may result in selection of an
|
| Models - Artificial Neural Networks 12
| |
| | inappropriate set of predictors (Sheppard
|
| CONCLUSION 12 REFERENCES 13 Introduction
| |
| | 1994). Chistine Zavgren developed a model
|
| A company trying to achieve its business
| |
| | that corrected for this problem. Her
|
| plan faces problems similar to those
| |
| | model used logit analysis to predict
|
| faced by a driver embarking on a long
| |
| | bankruptcy. Due to its use of logit
|
| trip. The likelihood that car and driver
| |
| | analysis, her model is considered more
|
| will reach their destination is dependent
| |
| | robust (Lo 1986). Further, logit analysis
|
| on: 1) how much fuel is in the car's tank
| |
| | actually provides a probability (in terms
|
| upon starting out, 2) the car's fuel
| |
| | of a percentage) of bankruptcy. Also, the
|
| efficiency, 3) how many service stations
| |
| | probability calculated might be
|
| will be available to refill the car's
| |
| | considered a measure of the effectiveness
|
| fuel tank along the way and 4) whether
| |
| | of management (ie. effective management
|
| the car's fuel tank is large enough to
| |
| | will not lead a company to the verge of
|
| cover unexpected accidents, delays, and
| |
| | bankruptcy). During the 1980s and 1990s,
|
| detours along the way. Similarly, whether
| |
| | the trend has been to use logit analysis
|
| or not a company survives in a highly
| |
| | in favour of multiple discriminant
|
| competitive business environment is
| |
| | analysis (Stickney 1996). More recently,
|
| dependent upon: 1) how financially
| |
| | logit analysis has been compared to a
|
| healthy the corporation is at its
| |
| | more advanced analytical tool, neural
|
| inception, 2) the company's ability (and
| |
| | networks. Research has found that the
|
| relative flexibility and efficiency) in
| |
| | approaches perform similarly and should
|
| creating cash from its continuing
| |
| | be used in combination (Altman, Marco,
|
| operations, 3) the company's access to
| |
| | and Varetto 1994). Altman's Z Score Based
|
| capital markets, and 4) the company's
| |
| | on multiple discriminate analysis (MDA),
|
| financial capacity and staying power when
| |
| | the model predicts a company's financial
|
| faced with unplanned cash shortfalls.
| |
| | health based on a discriminant function
|
| Measuring Financial Health There is no
| |
| | of the form:
|
| single measure of financial health.
| |
| | Z=0.012X1+0.014X2+0.033X3+0.006X4+0.999X5
|
| Ideally, solvency could be measured along
| |
| | Where: X1=working capital/total assets
|
| a continuum in the same way that fuel
| |
| | X2=retained earnings/total assets
|
| sufficiency can be measured using a car's
| |
| | X3=earnings before interest and taxes
|
| petrol gauge. Full health would equate
| |
| | total assets X4=market value of equity
|
| with having a full tank of fuel. Poor
| |
| | book value of total liabilities X5=sales
|
| health would be equivalent to showing an
| |
| | total assets The Z-Score model (developed
|
| empty tank. As healthiness progressively
| |
| | in 1968) was based on a sample composed
|
| decreased, the solvency gauge would
| |
| | of 66 manufacturing companies with 33
|
| register movement in the direction of
| |
| | firms in each of two matched-pair groups.
|
| relative insolvency. Ultimately, as
| |
| | The bankruptcy group consisted of
|
| healthiness continues to decline, the
| |
| | companies that filed a bankruptcy
|
| solvency gauge would hopefully flash a
| |
| | petition under Chapter 11 of the United
|
| warning light. Since, in the real world,
| |
| | States bankruptcy act from 1946 through
|
| no single measure of financial health
| |
| | 1965. Based on the sample, all firms
|
| exists, proxies that measure various
| |
| | having a Z-Score greater than 2.99
|
| aspects of solvency are often combined to
| |
| | clearly fell into the non-bankruptcy
|
| estimate a company's healthiness at a
| |
| | sector, while those firms having a
|
| point in time. Financial Distress As a
| |
| | Z-Score below 1.81 were bankrupt. Altman
|
| financially healthy company becomes more
| |
| | subsequently developed a revised Z-Score
|
| and more financially distressed, it
| |
| | model (with revised coefficients and
|
| ultimately enters an area of great
| |
| | Z-Score cut-offs) which dropped variables
|
| danger. Changes to the company's
| |
| | X4 and X5 (above) and replaced them with
|
| operations and capital structure (ie.
| |
| | a new variable X4 = net worth (book
|
| restructuring) must be made to remain
| |
| | value)/total liabilities. The X5 variable
|
| healthy. Apple Computers' attempts in
| |
| | was dropped to minimise potential
|
| recent years to restructure its
| |
| | industry effects related to asset
|
| operations to survive in the highly
| |
| | turnover. Around 1977, Altman developed
|
| competitive computer hardware business is
| |
| | jointly with a private financial firm
|
| a good example of a company trying to
| |
| | (ZETA Services, Inc.) a revised
|
| dramatically restructure itself in order
| |
| | seven-variable ZETA model based on a
|
| to maintain solvency. Continued decreases
| |
| | combined sample of 113 manufacturers and
|
| in financial health ultimately lead to
| |
| | retailers. The ZETA model is allegedly
|
| insolvency and then potentially,
| |
| | far more accurate in bankruptcy
|
| bankruptcy. Available evidence suggests
| |
| | classification in years 2 through 5 with
|
| many companies do not adequately attempt
| |
| | the initial year's accuracy about equal.
|
| to resolve their financial health
| |
| | However, the coefficients of the model
|
| problems until it is too late to avoid
| |
| | are not specified (without retaining ZETA
|
| bankruptcy. Factors Affecting Financial
| |
| | Services). The ZETA model is based on the
|
| Health Capital Structure and Capital
| |
| | following variables: return on
|
| Adequacy Companies finance their
| |
| | assets stability of earnings
|
| long-term operations primarily through
| |
| | debt service cumulative
|
| two sources of capital - debt and equity.
| |
| | profitability liquidity/current
|
| One of the most important financing
| |
| | ratio capitalisation (five year
|
| decisions a company makes is the
| |
| | average of total market value)
|
| proportion of debt to owner's equity in
| |
| | size (total tangible assets) Logit
|
| the company's capital structure. Summary
| |
| | Analysis: The Model Application of the
|
| measures of a company's capital structure
| |
| | logit model requires four steps. 1. a
|
| include the company's debt to equity
| |
| | series of seven financial ratios are
|
| ratio (D/E) and debt to total capital
| |
| | calculated. 2. each ratio is multiplied
|
| ratio (D/(D+E)). Interest and principal
| |
| | by a coefficient unique to that ratio.
|
| payments on debt must be paid from
| |
| | This coefficient can be either positive
|
| operations before any payments can be
| |
| | or negative. 3. the resulting values are
|
| distributed to equity holders (in the
| |
| | summed together (y). 4. the probability
|
| form of dividends or share buy-backs).
| |
| | of bankruptcy for a firm is calculated as
|
| Therefore, the interest and principal,
| |
| | the inverse of (1 + ey). Explanatory
|
| which must be paid on debt, are
| |
| | variables with a negative coefficient
|
| considered fixed-costs of operations.
| |
| | increase the probability of bankruptcy
|
| From an operational point-of-view, the
| |
| | because they reduce ey toward zero, with
|
| extent of the burden of these fixed
| |
| | the result that the bankruptcy
|
| obligations can be measured relative to
| |
| | probability function approaches 1/1, or
|
| the company's continuing ability to pay
| |
| | 100 percent. Likewise, independent
|
| the fixed obligations. A frequently used
| |
| | variables with a positive coefficient
|
| measure of a company's ability to cover
| |
| | decrease the probability of bankruptcy
|
| its interest payments is its earnings
| |
| | (Stickney 1996). Table 1 shows the
|
| before interest and taxes and before
| |
| | financial ratios used in the logit model
|
| depreciation and amortisation (EBITDA) to
| |
| | and their respective coefficients. TABLE
|
| its interest expense. A company is
| |
| | 1 - Financial Ratios used in Logit Model
|
| financially distressed whenever its
| |
| | FINANCIAL RATIO COEFFICIENT + 0.23883
|
| EBITDA is less than its interest expense.
| |
| | Average Inventories/Sales - 0.108 Average
|
| Financial leverage involves the
| |
| | Receivables/Average Inventories - 1.583
|
| substitution of fixed-cost debt for
| |
| | (Cash + Marketable Securities)/Total
|
| owner's equity in the hope of increasing
| |
| | Assets - 10.78 Quick Assets/Current
|
| equity returns. As demonstrated by
| |
| | Liabilities + 3.074 Income from
|
| Higgins and others, financial leverage
| |
| | Continuing Operations/(Total Assets -
|
| improves financial performance when
| |
| | Current Liabilities) + 0.486 Long-Term
|
| things are going well but worsens
| |
| | Debt/(Total Assets - Current Liabilities)
|
| financial performance when things are
| |
| | - 4.35 Sales/(Net Working Capital + Fixed
|
| going poorly. Therefore, increasing the
| |
| | Assets) + 0.11 y = Sum of (Coefficient *
|
| ratio of debt to equity in a company's
| |
| | Ratio) Probability of Bankruptcy = 1/(1 +
|
| capital structure implicitly makes the
| |
| | ey) Other Statistical Failure Prediction
|
| company relatively less solvent (on the
| |
| | Models Many additional bankruptcy
|
| downside) and more financially risky than
| |
| | prediction models have been developed
|
| a company without debt. Capital
| |
| | since the work of Beaver and Altman. Lev
|
| adequacy relates to whether a company has
| |
| | (1974), Deakin (1977), Ohlson (1980),
|
| enough capital to finance its planned
| |
| | Taffler (1980), Platt & Platt (1990),
|
| future operations. If the company's
| |
| | Gilbert, Menon, and Schwartz (1990), and
|
| capital is inadequate, then it must
| |
| | Koh and Killough (1990) amongst others
|
| either be able to: 1) successfully issue
| |
| | have continued to refine the development
|
| new equity, or 2) arrange new debt. The
| |
| | of multivariate statistical models.
|
| amount of debt a company can successfully
| |
| | Almost all of these traditional models
|
| absorb and repay from its continuing
| |
| | have been either matched-pair
|
| operations is normally referred to as the
| |
| | multi-discriminate models or logit
|
| company's debt capacity. Capital adequacy
| |
| | models. A 1997 study by Begley, Ming and
|
| is normally evaluated by looking at the
| |
| | Watts concludes: "Given that Ohlson's
|
| company's operational cash flow
| |
| | original model is frequently used in
|
| projections and its projections of
| |
| | academic research as an indicator of
|
| capital needs. When companies undertake
| |
| | financial distress, its strong
|
| major new projects or undergo a
| |
| | performance in this study supports its
|
| significant financial restructuring they
| |
| | use as a preferred model." The Gambler's
|
| often perform financial feasibility
| |
| | Ruin Models Wilcox (1971 and 1976),
|
| studies to determine whether the company
| |
| | Santomero (1977), Vinso (1979) and others
|
| has the financial capacity to undertake
| |
| | have adapted a gambler's ruin approach to
|
| the project and whether the company will
| |
| | bankruptcy prediction. Under this
|
| be able to repay all future debt payments
| |
| | approach, bankruptcy is probable when a
|
| once the project is built. Operating Cash
| |
| | company's net liquidation value (NLV)
|
| Flows and Cost Structure All other
| |
| | becomes negative. Net liquidation value
|
| factors being equal, companies that can
| |
| | is defined as total asset liquidation
|
| consistently generate positive cash flows
| |
| | value less total liabilities. From one
|
| from operations will remain relatively
| |
| | period to the next, a company's NLV is
|
| more solvent than those that cannot. This
| |
| | increased by cash inflows and decreased
|
| requires that operating cash inflows
| |
| | by cash outflows during the period.
|
| (collections or sales) consistently
| |
| | Wilcox combined the cash inflows and
|
| exceed operating cash outflows (costs).
| |
| | outflows and defined them as adjusted
|
| Companies which experience erratic cash
| |
| | cash flow. All other things being equal,
|
| outflows and inflows are relatively more
| |
| | the probability of a company's failure
|
| risky because they are less likely, in
| |
| | increases, the smaller the company's
|
| one or more time periods, to be able to
| |
| | beginning NLV, the smaller the company's
|
| cover fixed expenses/outflows. Companies
| |
| | adjusted (net) cash flow, and the larger
|
| which have a higher proportion of fixed
| |
| | the variation of the company's adjusted
|
| costs to variable costs are also
| |
| | cash flow over time. Wilcox uses the
|
| relatively more risky and relatively less
| |
| | gambler's ruin formula (Feller, 1968) to
|
| solvent than companies with a relatively
| |
| | show that a company's risk of failure is
|
| lower proportion of fixed costs in their
| |
| | dependent on; 1) the above factors plus,
|
| operating cost structure. Earnings
| |
| | 2) the size of the company's adjusted
|
| Capacity All other things being equal,
| |
| | cash flow at risk each period (ie. the
|
| companies with higher relative earnings
| |
| | size of the company's bet). Using a more
|
| and higher relative returns on investment
| |
| | robust statistical technique, Vinso
|
| will remain more solvent than their less
| |
| | (1979) extended Wilcox's gambler's ruin
|
| fortunate competitors. The most commonly
| |
| | model to develop a safety index. Based on
|
| used financial measures of earnings
| |
| | input concerning the variability of
|
| capacity are earnings before interest and
| |
| | expected contribution margin amounts, the
|
| taxes (EBIT) and net income. Liquidity
| |
| | index can be used to predict the point in
|
| Adequate liquidity is a further necessary
| |
| | time when a company's ruin is most likely
|
| component of solvency. Frequently used
| |
| | to occur (called first passage time). The
|
| liquidity measures include: a) working
| |
| | statistics used in gambler's ruin
|
| capital (current assets minus current
| |
| | approaches are somewhat formidable
|
| liabilities), b) current ratio (current
| |
| | (especially to the average reader).
|
| assets divided by current liabilities),
| |
| | However, both Wilcox and Vinso richly
|
| and c) quick ratio (cash, marketable
| |
| | describe some of the factors which most
|
| securities and accounts receivable
| |
| | affect business failure. For example,
|
| divided by current liabilities). To
| |
| | Wilcox states: "The (cash) inflow rate
|
| evaluate liquidity, each of the assets
| |
| | ... can be increased through higher
|
| and liabilities on a company's balance
| |
| | average return on investment. However,
|
| sheet should be evaluated for liquidity.
| |
| | having a major impact here usually
|
| Current assets are those which will
| |
| | requires long-term changes in strategic
|
| likely be converted to cash within one
| |
| | position. This is difficult to control
|
| year or less. Current liabilities are
| |
| | over a short time period except by
|
| those which must be paid within one year.
| |
| | divestitures of peripheral unprofitable
|
| However, when a company becomes
| |
| | businesses...The average outflow rate is
|
| financially distressed, even assets which
| |
| | controlled by managing the average growth
|
| are normally considered current assets
| |
| | rate of corporate assets. Effective
|
| (accounts receivable and stock, for
| |
| | capital budgeting ... requires resource
|
| example) may become relatively
| |
| | allocation emphasising those business
|
| "illiquid". Long-term assets, in general,
| |
| | units, which have the highest future
|
| are far less liquid than current assets.
| |
| | payoff. The size of the bet is the least
|
| Some longer-term assets may be very
| |
| | understood factor in financial risk. Yet
|
| "illiquid". Also, as stated above, often
| |
| | management has substantial control over
|
| a company's long-term liabilities can
| |
| | it. Variability in liquidity flows
|
| become immediately due and payable if the
| |
| | governs the size of the bet. This
|
| company violates contractual debt
| |
| | variability can be managed through
|
| covenants or other obligations. Wilcox
| |
| | dividend policy, through limiting earning
|
| (1976) argues that net liquidation value
| |
| | variability and investment variability,
|
| provides a solid conceptual basis for
| |
| | and through controlling the co-variation
|
| evaluating a company's liquidity. Net
| |
| | between profits and investments...True
|
| liquidation value is defined as total
| |
| | earnings smoothing is attained by control
|
| asset liquidation value less total
| |
| | of exposure to volatile industries,
|
| liabilities. Wilcox (1976) applies what
| |
| | diversification, and improved strategic
|
| he calls typical (not definitive)
| |
| | position." Vinso supports Wilcox's
|
| valuation multipliers to balance sheet
| |
| | emphasis on cash flow processes and
|
| assets to arrive at representative asset
| |
| | stresses the importance of debt capacity:
|
| liquidation values: Cash
| |
| | "Before deriving a mathematical model for
|
| Equivalents 100% Other Current
| |
| | determining the risk of ruin, it is
|
| Assets 70% Long Term Assets 50%
| |
| | necessary to describe the process. First,
|
| Wilcox (1976) shows that a company
| |
| | a firm has some pool of resources at time
|
| becomes bankrupt when net liquidation
| |
| | = 0 of some size U0, which are available
|
| value is reduced to zero. Asset
| |
| | to prevent ruin (similar to Wilcox's
|
| Conversions - "Growing Broke" Asset and
| |
| | beginning NAV). Then, earnings come to
|
| liability conversions are continuously
| |
| | the firm from revenue(s)...less the costs
|
| ongoing in any dynamic business.
| |
| | incurred in producing the revenues. There
|
| Operationally, the company is selling its
| |
| | are two types of costs to be considered:
|
| products thereby creating cash inflows.
| |
| | variable, which change according to the
|
| Alternatively, sales may be made on
| |
| | stochastic nature of the revenue sources,
|
| credit, increasing the company's accounts
| |
| | and fixed costs, which do not vary with
|
| receivable. Concurrently, inventories are
| |
| | revenue but are a function of the period.
|
| produced and sold and production and
| |
| | So, revenue less variable costs...can be
|
| operating expenses are incurred to
| |
| | defined as variable profit (which is
|
| continue operations. If a company's
| |
| | available to pay fixed costs). If Ut is
|
| inventories and accounts receivable grow
| |
| | less than zero, ruin occurs because no
|
| faster than the corresponding growth in
| |
| | funds are available to meet unpaid fixed
|
| the company's sales and accounts payable,
| |
| | costs...These definitions, however,
|
| liquidity will be negatively affected.
| |
| | ignore debt capacity, if available, which
|
| Strategic asset conversions are also
| |
| | must be included as the firm can use this
|
| ongoing, but with less regularity.
| |
| | source without being forced to confront
|
| Decisions to invest in 'bricks and
| |
| | shareholders, creditors or
|
| mortar' and other long-term investments
| |
| | bankruptcy,...debt holders or other
|
| are made and debt and equity are obtained
| |
| | creditors will force reorganisation if a
|
| to supply the capital needed to pay for
| |
| | firm is unable to meet contractual
|
| them. Slowly but surely, companies can
| |
| | obligations because working capital is
|
| 'go broke' when assets are converted to
| |
| | too low and the firm cannot obtain more
|
| less liquid forms over a sustained time
| |
| | debt." Alternative Models - Artificial
|
| period. This can happen when the
| |
| | Neural Networks Since 1990, another
|
| company's assets grow faster than the
| |
| | promising approach to bankruptcy
|
| company's sales (often the case for many
| |
| | prediction, based on the use of neural
|
| start-up companies). When this happens,
| |
| | networks, has evolved. Artificial Neural
|
| the company becomes more highly leveraged
| |
| | Networks (ANN) are computers constructed
|
| and less solvent. Similarly, a company
| |
| | to process information, in parallel,
|
| whose long term investment decisions do
| |
| | similar to the human brain. ANN's store
|
| not pay off in terms of planned operating
| |
| | information in the form of patterns and
|
| returns (thus increasing fixed cost
| |
| | are able to learn from their processing
|
| structures and decreasing operating cash
| |
| | experience. Unlike MDA and logit
|
| flows), will become less solvent. Asset
| |
| | analyses, ANN's impose less restrictive
|
| Utilisation Efficiency/Turnover Those
| |
| | data requirements (the requirement for
|
| companies, which survive, use their human
| |
| | linearity, for example) and are
|
| and capital assets relatively
| |
| | especially useful in recognising and
|
| efficiently. That is, they have
| |
| | learning complex data relationships.
|
| relatively higher returns on investment
| |
| | Recent ANN bankruptcy prediction studies
|
| (ROI) and higher returns per employee
| |
| | include those of Bell, et al. (1990),
|
| than less successful competitors. They
| |
| | Hansen & Messier (1991), Chung & Tam
|
| achieve relatively higher returns through
| |
| | (1992), Liang, et al. (1992), Tam & Kiang
|
| superior asset management (capital and
| |
| | (1992), Salchenberger (1993), Coats &
|
| human assets) and through superior
| |
| | Fant (1993), Fanning & Cogger (1994),
|
| strategic positioning. In the absence of
| |
| | Brockett, et al. (1994), Boritz, et al.
|
| aggressive asset management, companies
| |
| | (1995), and Etheridge & Siriam (1995 and
|
| must usually resort to wholesale asset
| |
| | 1997). Research has shown that ANN's
|
| divestitures and/or are forced to
| |
| | offer a viable alternative to other more
|
| restructure to fund their continuing
| |
| | traditional methods of bankruptcy
|
| operations. Strategic Position Schoffler
| |
| | prediction. The ability of the model to
|
| (Buzzell and Gale, 1987) and others have
| |
| | learn allows for the constant
|
| documented the high correlation between
| |
| | re-calibration and validation of the
|
| positive returns on investment and such
| |
| | model, which helps increase
|
| factors as: 1) higher relative market
| |
| | classification rates. From a theoretical
|
| shares, 2) relative product quality and
| |
| | perspective, ANN's are more desirable
|
| 3) lower relative capital intensity.
| |
| | because they make fewer assumptions about
|
| Companies that have strong strategic
| |
| | the data normality and linear
|
| market positions are more likely to
| |
| | separability. One of the main
|
| experience higher relative returns on
| |
| | disadvantages of ANN's is the inability
|
| investment than their competitors. These
| |
| | to assign intuition the network weights.
|
| positive returns, in turn, increase the
| |
| | Another disadvantage is that the model
|
| solvency of the market leaders. Those
| |
| | might simply memorise the data as opposed
|
| competitors that have lower market shares
| |
| | to forming a general set of
|
| or lower product quality are less likely
| |
| | classification rules, which can cause
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| to achieve industry average returns and
| |
| | estimates on future samples to be less
|
| are thus more likely to become less
| |
| | reliable. Conclusion Future research in
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| solvent in the future. Predicting
| |
| | bankruptcy prediction should analyse the
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| Financial Distress In America, each year
| |
| | economic and institutional factors that
|
| approximately one percent of all firms
| |
| | can impact the reasons for bankruptcy.
|
| required to file with the Securities and
| |
| | Jones (1987) indicated that the lack of
|
| Exchange Commission file for bankruptcy.
| |
| | homogeneity in the motivation for a
|
| The American Bankruptcy Institute reports
| |
| | bankruptcy filing might complicate the
|
| that around 50,000 businesses filed for
| |
| | modelling effort. Although normally
|
| bankruptcy in 1997. Attempts to develop
| |
| | motivated by an effort to resolve severe
|
| bankruptcy prediction models began
| |
| | financial problems, a firm may file for
|
| seriously sometime in the late 1960's and
| |
| | bankruptcy primarily to void a union
|
| continue through today. At least three
| |
| | contract or for other legal reasons
|
| distinct types of models have been used
| |
| | (Jones 1987). Another area where models
|
| to predict bankruptcy: a) statistical
| |
| | can be improved is in catering for
|
| models (univariate analysis, multiple
| |
| | predictor variables other than financial
|
| discriminate analyses [MDA]), and
| |
| | ratios may prove beneficial. For example,
|
| conditional logit regression analyses, b)
| |
| | measures of management experience,
|
| gambler's ruin-mathematical/statistical
| |
| | management expertise, or other
|
| models, and c) artificial neural network
| |
| | behavioural aspects that impact the
|
| models. Each of these models is discussed
| |
| | operations of the firm could be
|
| below. Most of the publicly available
| |
| | significant in a bankruptcy prediction
|
| information regarding prediction models
| |
| | model. Additionally, including variables
|
| is based on research published by
| |
| | that control for a changing economic
|
| academics. Commercial banks, public
| |
| | environment may provide valuable insights
|
| accounting firms and other institutional
| |
| | for predicting bankruptcy. Bibliography
|
| entities (ratings agencies, for example)
| |
| | References Altman, Edward I. Corporate
|
| appear to be the primary beneficiaries of
| |
| | Financial Distress. New York, NY: John
|
| this research, since they can use the
| |
| | Wiley and Sons, 1983. Altman, Edward I.
|
| information to minimise their exposure to
| |
| | (1968) Financial Ratios, Discriminate
|
| potential client failures. While
| |
| | Analysis and the Prediction of Corporate
|
| continuing research has been ongoing for
| |
| | Bankruptcy, The Journal of Finance.
|
| almost thirty years, it is interesting to
| |
| | Altman, Edward I. Homepage of Professor
|
| note that no unified well-specified
| |
| | Edward I. Altman, New York, NY: Stern
|
| theory of how and why corporations fail
| |
| | School of Business. Available at Altman,
|
| has yet been developed. The available
| |
| | Edward I, Giancarlo Marco, and Franco
|
| statistical models derive merely from the
| |
| | Varetto (1994) Corporate Distress
|
| statistical optimisation of a set of
| |
| | Diagnosis: Comparisons Using Linear
|
| ratios. As stated by Wilcox (1973) the
| |
| | Discriminant Analysis and Neural Networks
|
| lack of conceptual framework results in
| |
| | (the Italian Experience), The Journal of
|
| the limited amount of available data on
| |
| | Banking and Finance. Altman, Edward I.
|
| bankrupt firms being statistically 'used
| |
| | and Thomas P. McGough (1974) Evaluation
|
| up' by the search before a useful
| |
| | of a Company as a Going Concern, The
|
| generalisation emerges. How useful are
| |
| | Journal of Accountancy. Beaver, W., 1967,
|
| these models? Almost universally, the
| |
| | Financial Ratios as Predictors of
|
| decision criterion used to evaluate the
| |
| | Failures, in Empirical Research in
|
| usefulness of the models has been how
| |
| | Accounting, Journal of Accounting
|
| well they classify a company as solvent
| |
| | Research. Begley, J., Ming, J., Watts,
|
| or non-solvent compared to the company's
| |
| | S., 1997,Bankruptcy Classification Errors
|
| actual status known after-the-fact. Most
| |
| | in the 1980s: An Empirical Analysis of
|
| of the studies consider a type I error as
| |
| | Altman's and Ohlson's Models, Review of
|
| the classification of a failed company as
| |
| | Accounting Studies. Bell, T.B., G.S.
|
| healthy, and consider a type II error as
| |
| | Ribar and J. Verchio, 1990, Neural Nets
|
| the classification of a healthy company
| |
| | Versus Logistic Regression: A Comparison
|
| as failed. In general, type I errors are
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