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Bankruptcy Prediction for Restaurant Firms: A Comparative Analysis of Multiple Discriminant Analysis and Logistic Regression

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  • Yang Huo

    (Department of Strategy Management and Operations, Utah Valley University, Orem, UT 84058, USA)

  • Leo H. Chan

    (Department of Finance and Economics, Utah Valley University, Orem, UT 84058, USA)

  • Doug Miller

    (Department of Strategy Management and Operations, Utah Valley University, Orem, UT 84058, USA)

Abstract

In this paper, we used data from publicly traded restaurant firms between 2000 and 2019 to test the effectiveness of multiple discriminant analysis (MDA) and logistic regression (logit) in predicting the probability of bankruptcy in the restaurant industry. We constructed various financial ratios extracted from the financial information and analyzed them to determine the optimal models. Our results show that liquid ratios (particularly the quick ratio), operating cash flow, and working capital emerge as the most crucial indicators of potential bankruptcy filings for restaurant firms. The results also show that the logit model performs better within the sample. However, both models exhibit similar predictive capacities with out-of-sample data.

Suggested Citation

  • Yang Huo & Leo H. Chan & Doug Miller, 2024. "Bankruptcy Prediction for Restaurant Firms: A Comparative Analysis of Multiple Discriminant Analysis and Logistic Regression," JRFM, MDPI, vol. 17(9), pages 1-15, September.
    • Handle: RePEc:gam:jjrfmx:v:17:y:2024:i:9:p:399-:d:1473008
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    References listed on IDEAS

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    1. repec:eme:mfppss:03074350310768409 is not listed on IDEAS
    2. Kim, Soo Y. & Upneja, Arun, 2014. "Predicting restaurant financial distress using decision tree and AdaBoosted decision tree models," Economic Modelling, Elsevier, vol. 36(C), pages 354-362.
    3. Grice, John Stephen & Dugan, Michael T, 2001. "The Limitations of Bankruptcy Prediction Models: Some Cautions for the Researcher," Review of Quantitative Finance and Accounting, Springer, vol. 17(2), pages 151-166, September.
    4. Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 23(4), pages 589-609, September.
    5. Richard Carter & Howard Van Auken, 2006. "Small Firm Bankruptcy," Journal of Small Business Management, Taylor & Francis Journals, vol. 44(4), pages 493-512, October.
    6. Soo-Seon Park & Murat Hancer, 2012. "A Comparative Study of Logit and Artificial Neural Networks in Predicting Bankruptcy in the Hospitality Industry," Tourism Economics, , vol. 18(2), pages 311-338, April.
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