CORPORATE BANKRUPTCY AND INSOLVENCY PREDICTION MODEL

Alina Daniela Voda,Gabriela Dobrotă,Dănuț Dumitru Dumitrașcu,Dan Dobrotă,Diana Mihaela Țîrcă

doi:10.3846/tede.2021.15106

Abstract

In any competitive economy, the risk of bankruptcy is pervasive. The research aims to contribute in improving the predictive power of bankruptcy and insolvency risk among companies by introducing new methods of processing and validation. This paper investigates the extensive application of the Z score model for predicting the economic-financial stability of Romanian companies in the manufacturing and extractive industries. A list of 37 financial indicators determined on the basis of the balance sheet data of 80 companies for the period 2015–2018 was used. Stepwise Least Squares Estimation through the Forward method allowed the identification of the most relevant ones. Canonical discriminant analysis and sensitivity analyzes were introduced to test the predictive power of the model. The new model identified allows both the prediction of bankruptcy and insolvency risk. This study contributes to the literature by testing variables in relation to financial difficulties and by including other classification information. The robustness of the determined canonical discriminant function was verified by testing the model on two other samples.

Highlights

Competitive economic environment is constantly subject to multiple risks, which requires the application of rigorous principles for their management
It is not possible to talk about the existence of a bankruptcy risk of a business in the absence of a financial-accounting diagnosis to determine the state of insolvency, recognized as that state of the patrimony of an entity characterized by insufficient funds for the payment of determined, liquid and matured debts
In this approach for obtaining a bankruptcy or insolvency risk assessment model, a thorough selection of data is imperative in order not to diminish their predictability capacity

Summary

Introduction

Competitive economic environment is constantly subject to multiple risks, which requires the application of rigorous principles for their management. Both faulty managerial decisions and fiscal pressure or competition increases lead these businesses to the verge of bankruptcy. Changes in the business environment as a result of entering new markets or restructuring the economy can lead to. It is not possible to talk about the existence of a bankruptcy risk of a business in the absence of a financial-accounting diagnosis to determine the state of insolvency, recognized as that state of the patrimony of an entity characterized by insufficient funds for the payment of determined, liquid and matured debts. Indicators specific to liquidity and financial solvency are essential elements in identifying financial problems at the level of the economic entity, providing clues about the ability of the company to pay due tax obligations, the extent to which equity can cover long-term debt, and about the financial resources currently available

Objectives

Methods

Results

Conclusion