Performance Comparison of Multiple Discriminant Analysis and Logit Models in Bankruptcy Prediction

By Mihalovic, Matús | Economics & Sociology, October 1, 2016 | Go to article overview

Performance Comparison of Multiple Discriminant Analysis and Logit Models in Bankruptcy Prediction


Mihalovic, Matús, Economics & Sociology


(ProQuest: ... denotes formulae omitted.)

Introduction

The outset of the global financial crisis is considered to be the year 2008, when the subprime crisis bubble in the United States bursted. Since then, we have observed to a much greater extent business cycle fluctuations resulting in numerous macroeconomic and microeconomic imbalances. Since companies are thought to be the economic subjects operating within the macroeconomic area, they are also affected by the abovementioned imbalances.

Because of the interconnectedness across national economies, Slovak companies also have been experiencing financial difficulties. Often, companies encounter a problem of unpaid bills, secondary insolvency, low law inforcement etc. These deficiences are easily transferred onto other companies. Such a tendency is also reffered to as contagion or knockon effect. Likewise, it should be noted here that bankruptcy law in Slovakia often prefers the debtors' interests over those of creditors. A clear evidence is provided by the well-known instances as Váhostav or Doprastav. Occasionally, there can be a situation when financially distressed company receive investment aid from the state or governmnet bodies. To avoid this type of situation, it is reasonable to have some early warning system capable of timely prediction of such situations.

Over the decades starting from the 1960s up to this point, there have been developed several early warning systems aiming at timely prediction of impeding companies' financial difficulties. It is possible to group them into various categories. In the study by Taffler and Agarwal (2008), these models are divided into two groups: (i) accounting-based models; (ii) market-based models. An application of market-based models in Slovakia is restricted by the underdeveloped capital market. Therefore, in the process of bankruptcy prediction model development, application of accounting-based models is suggested. The use of accounting prediction methods has certain drawbacks, as indicated by the abovementioned authors, including the following: (i) accounting statements present past performance of a firm and may or may not be informative in predicting the future, (ii) conservatism and historical cost accounting mean that true asset values may be very different from the recorded book values, (iii) accounting numbers are subject to manipulation by management, and in addition, (iv) accounting statements are prepared on a going-concern basis. In spite of these limitations, it was confirmed that accounting-based models are not inferior in comparison to market-based models.

Even though application of bankruptcy prediction models is widely spread in Western advanced economies, it has become the fast growing research area in case of transitional economies, including countries of Central and Eastern Europe. Such a growing interest may result from several considerations, e.g. (i) financial institutions under Basel II guidelines are allowed to use their own internal ratings to assess the risk parameters of loan applicants; (ii) joining the EU structures, companies may take the opportunity to receive subsidy. In attempting to distunguish between well-established companies from distressed ones, failure prediction models are used; (iii) expanded activities of private equity financial groups. Specifically, its objective is to find potential company to invest in, merge or acquire. Prediction models may also serve as additonal tools in investors' decision-making.

The focus in this study is on bankruptcy prediction model development based on two various statistical methods as applied to Slovakia. These includes both logistic regression function as well as multiple discriminant function under which we may find financial ratios best distinguishing among healthy and unhealthy companies. Thus, the main objective of this study is to compare the performance of the two proposed bankruptcy prediction models on a sample of selected firms operating in Slovak economic environment. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

Performance Comparison of Multiple Discriminant Analysis and Logit Models in Bankruptcy Prediction
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.