MEASURING FINANCIAL DISTRESS AND PREDICTING CORPORATE BANKRUPTCY: AN INDEX APPROACH

Qunfeng Liao () and Seyed Mehdian ()
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Qunfeng Liao: School of Management, The University of Michigan-Flint, 303 E. Kearsley Street, Flint, MI 48502, (810) 762-3266, qunliao@umflint.edu
Seyed Mehdian: School of Management, The University of Michigan-Flint, 303 E. Kearsley Street, Flint, MI 48502, (810) 762-3266, qunliao@umflint.edu

Review of Economic and Business Studies, 2016, issue 17, 33-51

Abstract: In this paper, we follow Anderson et al. (2009) and suggest a simple approach to employ a set of financial ratios as inputs to estimate an aggregate bankruptcy index (ABI). This index is a within sample measure, ranges between 0 and 1, and ranks the firms on the basis of their relative financial distress. ABI can be used to predict the propensity of financial failure and corporate bankruptcy. For the purpose of comparison and assessment of the robustness of this index, we estimate Z-score by multivariate discriminant analysis, using the same set of financial ratios to compare the predictive accuracy of two approaches. We find that, to some extent, ABI can predict the bankruptcy of the firms more accurately than Z-score. The empirical results of the paper suggest that ABI has relatively robust predictive power and, therefore, can be applied together with other, based on parametric and non-parametric models to predict corporate bankruptcy.

Keywords: corporate bankruptcy prediction; financial distress; aggregate bankruptcy index (search for similar items in EconPapers)
JEL-codes: G33 M41 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:aic:revebs:y:2016:j:17:liaoq

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