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Financial ratios and the prediction of bankruptcy

Author

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  • Jeyhun A. Abbasov

    (Central Bank of Azerbaijan Republic)

Abstract

In this work 10 financial ratios of 835 companies (48 companies were default and 787 companies were non-default) were used for prediction of bankruptcy. On the base of different combinations of these ratios which were formed by the taking one ratio from each financial factor such as financial leverage, capital turnover, cash position, etc., 16 z-score models estimated. Unfortunately, there was small compliance for predictability power of these bankruptcy models. On the other hand, we separately used all ratios (for example; X3 – cash/Total Assets, X6 – cash/Sales) classified by the same factor (for X3 and X6, cash position) in different models and found that it doesn’t change the result of the predictability power of the bankruptcy models. Fortunately, this result shows the same pattern with most of the papers in this area.

Suggested Citation

  • Jeyhun A. Abbasov, 2017. "Financial ratios and the prediction of bankruptcy," Working Papers 1705, Central Bank of Azerbaijan Republic.
    • Handle: RePEc:aze:wpaper:1705
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    References listed on IDEAS

    as
    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. Milos Sprcic, Danijela & Klepac, Marija & Suman, Paola, 2013. "THE APPLICABILITY OF THE EDMISTER MODEL FOR THE ASSESSMENT OF CREDIT RISK IN CROATIAN SMEs," UTMS Journal of Economics, University of Tourism and Management, Skopje, Macedonia, vol. 4(2), pages 163-174.
    4. Ohlson, Ja, 1980. "Financial Ratios And The Probabilistic Prediction Of Bankruptcy," Journal of Accounting Research, Wiley Blackwell, vol. 18(1), pages 109-131.
    5. 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.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Kappa test; Altman’s z-score; Edmister’s z-score; predictability power; prediction of bankruptcy;
    All these keywords.

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models

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