Corporate Failure Prediction: A Fresh Technique for Dealing Effectively With Normality Based On Quantitative and Qualitative Approach
Journal Title: International Journal of Financial Economics - Year 2014, Vol 2, Issue 1
Abstract
This study uses a combination of quantitative and qualitative models to predict business failure with an appreciable degree of accuracy and/or precision. Quantitatively, the study used Factor Analysis (FA) to reduce the dimensionality of the data and further employed the Generalised Linear Modelling (GLM) technique which skips and/or relaxes the use of the normality assumption test that must be used by the General linear models. Qualitatively, the study adopted the most notable qualitative A- score model of Argenti (1976), which suggests that business failure process follows three predictable sequences: Defects, Mistakes made and Symptoms of failure. Among the three link functions (models) of GLM, the Logit model provides the highest overall accuracy rate with the lowest Akaike Information Criteria (AIC): 49.484. Regarding the 19 corporate determinants classified into 5 distinct categories, namely: Profitability and Employee Efficiency, Leverage and Liquidity, Asset utilization, Growth ability and Size, the significant variables that have appeared as a consistent indicator of financially distressed companies in the best model (logit) are Profitability ratio (Return on total assets) and Leverage ratio (Solvency, Gearing and Interest cover).In terms of the qualitative analysis, it was revealed that organizations that are prone and susceptible to corporate failure display high scores in defects usually in the range of 40 which is a high rate in the scale of 43 (highly unsatisfactory). As far as the three main mistakes are concerned (high gearing, overtrading and the big project) which failed companies exhibit, high gearing had a higher score of 15 which validates the findings in the quantitative analysis. Among symptoms of failure (Financial signs, Creative accounting, Non-financial signs – various signs include frozen management salaries, delayed capital expenditure, Terminal signs – at the end of the failure process, the financial and non-financial signs become so obvious and debilitating that even the casual observer recognises them), Financial signs holds sway posting a higher score of (16).
Authors and Affiliations
Alhassan Bunyaminu, Shani Bashiru
Keywords
Related Articles
- EP ID EP27252
- DOI -
- Views 325
- Downloads 10
Ratio Analysis of Profitability of Its Activities in Sector Food and Beverage Listed In Indonesia Stock Exchange
This study aims to determine the financial ratios that affect the profitability of companies in the food and beverage sector are listed in Indonesia Stock Exchange. This test uses a linear regression of capital. The sa...
Corporate Governance and Maqasid Shariah: An Empirical Study on Management Practices of Takaful Operators in Malaysia
The development of the takaful industry in Malaysia has seen tremendous growth since its inception and has emerged as an important component of the Islamic financial system in Malaysia. Being an Islamic institution, th...
Business Failure Prediction: An emperical study based on Survival Analysis and Generalized Linear Modelling (GLM) Techniques
This study investigated business failure using financial (ratios) and non-financial factors of listed companies on Ghana Stock Exchange. A combination of quantitative and qualitative variables have been used to predict...
Divisia Monetary Aggregates and Demand for Money in Nigeria.
The Nigerian financial system has undergone several transformations over the past few decades leading to financial innovations. These innovations have altered the definition and use of monetary aggregates as a monetary...
Evaluation of Financial Distress: A Case Study of UCHUMI Supermarket Ltd
There exists no conclusive agreement on which financial ratio(s) are most appropriate to assess the likelihood of financial distress and the successful turnaround strategies of recovering firms. This study evaluates fi...