Corporate Bankruptcy Prediction Model, a Special Focus on Listed Companies in Kenya

Daniel Ogachi,Richard Ndege,Zeman Zoltan,Peter Gaturu

doi:10.3390/jrfm13030047

Abstract

Predicting bankruptcy of companies has been a hot subject of focus for many economists. The rationale for developing and predicting the financial distress of a company is to develop a predictive model used to forecast the financial condition of a company by combining several econometric variables of interest to the researcher. The study sought to introduce deep learning models for corporate bankruptcy forecasting using textual disclosures. The study constructed a comprehensive study model for predicting bankruptcy based on listed companies in Kenya. The study population included all 64 listed companies in the Nairobi Securities Exchange for ten years. Logistic analysis was used in building a model for predicting the financial distress of a company. The findings revealed that asset turnover, total asset, and working capital ratio had positive coefficients. On the other hand, inventory turnover, debt-equity ratio, debtors turnover, debt ratio, and current ratio had negative coefficients. The study concluded that inventory turnover, asset turnover, debt-equity ratio, debtors turnover, total asset, debt ratio, current ratio, and working capital ratio were the most significant ratios for predicting bankruptcy.

Highlights

Bankruptcy prediction is a technique of forecasting and projecting on company financial distress of both public and firms
The findings revealed a positive correlation effect of Inventory Turnover (ITO), Debt-Equity Ratio (DER), Current Ratio (CR), and Working Capital Ratio (WCR) on the dependent variables
Knowledge of an upcoming bankruptcy is a crucial aspect of the decision-making process of the imperilled company itself, as well as of other institutions interacting with the company

Summary

Introduction

Bankruptcy prediction is a technique of forecasting and projecting on company financial distress of both public and firms. The purpose of predicting bankruptcy is fundamental in assessing the financial condition of a company and prospects in its operations. Corporate bankruptcy prediction is a very crucial phenomenon in economics. The financial soundness of a company is of great importance to the various actors and participants of the business cycle. The participants and interested parties include the policymakers, investors, banks, internal management, and the general public referred to as consumers. Accurate prediction of the financial performance of companies is of great importance to various stakeholders in making important and significant decisions concerning their relationship and engagement with companies. Financial distress is a global phenomenon that affects companies across all sectors of the economy (Zhang et al 2013)

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