Discriminant analysis: a study on corporate distress
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Date
2010
Authors
Ahmad, Nurhafizah
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Abstract
The main purposes of this study are to identify which financial ratios are significantly
important in predicting distressed companies and subsequently construct prediction models
for business failure. In order to answer the research questions, this study applied the
discriminant analysis on a sample of 28 distressed and 28 healthy firms listed in the Bursa
Malaysia during the period from the year 2004 to 2008. The distressed companies
represented by Practice Note 17 companies (PN17) and the healthy companies are matched
belonged to the same industries classification and have the closest assets. Through the usage
of multivariate test, it is found that the financial ratios able to discriminate the two groups
(healthy and distress situation) at once answering the first research question. The model
appeared to be fairly accurate with classification accuracy rate more than 70% up to three
years before distressed. In addition, Return on Assets is the most important predictor of
financial distress for three consecutive years. Finally, it is expected that the models can be
an early warning system to the firms so that appropriate strategies can be planned in order to
avoid financial crisis.
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Keywords
Corporate distress