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The Prediction of Corporate Failure: Testing the Australian Experience

Author

Listed:
  • A. D. Castagna
  • Z. P. Matolcsy

    (Kuring-gai College of Advanced Education. The helpful comments of L.H. Greenwood, referees of this journal, and the support of The Sydney Stock Exchange are gratefully acknowledged.)

Abstract

The purpose of this paper is to address some of the methodological issues which have evolved from the literature on corporate failures, and to report the results of an empirical investigation on the usefulness of financial models for the prediction of corporate failures. The experimental design is based on the 21 listed public companies that failed in Australia during the period 1963 to 1977, inclusive, and which met with minimum data requirements. It examines the performance of linear versus quadratic classification rules; temporal versus atemporal models; equal versus unequal priors of failure, variable dimension reduction, and a validation test proposed by Lachenbruch (1967). The results of the study suggest that it is difficult to identify a unique model to predict corporate failures, without specifying the utility preference of the user. Utility preference in this context refers to the minimization of either Type I, Type II, or the overall error rate of a failure model.

Suggested Citation

  • A. D. Castagna & Z. P. Matolcsy, 1981. "The Prediction of Corporate Failure: Testing the Australian Experience," Australian Journal of Management, Australian School of Business, vol. 6(1), pages 23-50, June.
    • Handle: RePEc:sae:ausman:v:6:y:1981:i:1:p:23-50
    DOI: 10.1177/031289628100600102
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    References listed on IDEAS

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    1. Edmister, Robert O., 1972. "An Empirical Test of Financial Ratio Analysis for Small Business Failure Prediction," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 7(2), pages 1477-1493, March.
    2. 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.
    3. Altman, Edward I. & Haldeman, Robert G. & Narayanan, P., 1977. "ZETATM analysis A new model to identify bankruptcy risk of corporations," Journal of Banking & Finance, Elsevier, vol. 1(1), pages 29-54, June.
    4. Altman, Edward I. & Margaine, Michel & Schlosser, Michel & Vernimmen, Pierre, 1974. "Financial and Statistical Analysis for Commercial Loan Evaluation: A French Experience," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 9(2), pages 195-211, March.
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    Cited by:

    1. Rose Kenney & Gianni La Cava & David Rodgers, 2016. "Why Do Companies Fail?," RBA Research Discussion Papers rdp2016-09, Reserve Bank of Australia.
    2. Maria H. Kim & Graham Partington, 2015. "Dynamic forecasts of financial distress of Australian firms," Australian Journal of Management, Australian School of Business, vol. 40(1), pages 135-160, February.
    3. Lillian Cheung & Amnon Levy, 1998. "An integrative analysis of business bankruptcy in Australia," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 22(2), pages 149-167, June.
    4. Divesh Sharma & Errol Iselin, 2003. "The decision usefulness of reported cash flow and accrual information in a behavioural field experiment," Accounting and Business Research, Taylor & Francis Journals, vol. 33(2), pages 123-135.
    5. Z.P. Matolcsy & G.P. Pazmandy, 1995. "Predicting Half-Yearly Accounting Income Numbers With Statistical Models," Australian Accounting Review, CPA Australia, vol. 5(10), pages 56-63, November.
    6. Izan, H. Y., 1984. "Corporate distress in Australia," Journal of Banking & Finance, Elsevier, vol. 8(2), pages 303-320, June.
    7. Malcolm Smith & Yun Ren & Yinan Dong, 2011. "The predictive ability of “conservatism” and “governance” variables in corporate financial disclosures," Asian Review of Accounting, Emerald Group Publishing Limited, vol. 19(2), pages 171-185, July.
    8. Marianna SUCCURRO & Lidia MANNARINO, 2014. "The Impact Of Financial Structure On Firms’ Probability Of Bankruptcy: A Comparison Across Western Europe Convergence Regions," Regional and Sectoral Economic Studies, Euro-American Association of Economic Development, vol. 14(1), pages 81-94.
    9. Juliana Yim & Heather Mitchell, 2007. "Predicting Financial Distress In The Australian Financial Service Industry," Australian Economic Papers, Wiley Blackwell, vol. 46(4), pages 375-388, December.

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