Bankruptcy prediction model for listed companies in Greece

Evangelos Sfakianakis

doi:10.21511/imfi.18(2).2021.14

Abstract

This paper deals with the ever-increasing issue of bankruptcy prediction in distressed economies. Specifically, the aim of this study is to create a model by establishing a new set of predictor variables, which achieves significant discrimination among listed manufacturing firms in Greece, by using multivariate discriminant analysis (MDA). An equally balanced matched sample of 28 Greek-listed manufacturing firms was used in this study covering the distressed period from 2008 to 2015 (including all firms that went bankrupt between 2008–2015). It is found that the quick ratio, cash flow interest coverage, and economic value added (EVA) divided by total assets are significant for predicting bankruptcy in Greece. The discriminant analysis (DA) model comprised the aforementioned variables and correctly classified 96.43% of grouped cases 1 year before bankruptcy. The adjusted DA prediction model for two and three years before bankruptcy used the same variables and correctly classified 92.86% and 89.29% of grouped cases, respectively. Consequently, this mix of financial ratios achieved strong classification accuracy even three years before bankruptcy, captivating an overall picture of a firm’s financial health and providing a powerful tool for decision making to investors and risk managers in the banking section and economic policy makers.

Highlights

The year 2008 is seen by many as the beginning of the global financial crisis, when the subprime crisis bubble burst in the United States, affecting most economies throughout the world
The aim of this study is to create a model by establishing a new set of predictor variables, which achieves significant discrimination among listed manufacturing firms in Greece, by using multivariate discriminant analysis (MDA)
It is found that the quick ratio, cash flow interest coverage, and economic value added (EVA) divided by total assets are significant for predicting bankruptcy in Greece

Summary

Introduction

The year 2008 is seen by many as the beginning of the global financial crisis, when the subprime crisis bubble burst in the United States, affecting most economies throughout the world. Greece was already distressed, dealing with increasingly massive debt and waiting for a trigger to burst. That trigger was transatlantic, plunging the entire country into one of the greatest financial crises of its recent history. The unbearable austerity measures imposed led a significant number of Greek firms to either flirt with bankruptcy or eventually go bankrupt. The stressed condition of the Greek economy provides a good opportunity to study the variables that may help forecast better bankruptcy under special economic conditions. During that time, Greece was the absolute definition of a stressed economy, as this was reflected on the international economic news. The above stressed period may be the case of a natural experiment, providing the framework for financial ratio analysis and the potential to develop an alternative bankruptcy prediction model

Objectives

Methods

Results

Discussion

Conclusion