Abstract
This study examines the relevance of accounting based models in the prediction of financial distress and corporate failure. Using a sample of 30 commercial banks, consisting of 15 failed and 15 non failed banks during the period 2006-2020, the study utilizes the Logit and Multiple Discriminant Analysis (MDA) models using accounting information to predict the likelihood of failure within the Nigerian banking sector. The empirical results reveal that bank characteristics derived from financial statements can be used to predict corporate failure. Specifically, bank liquidity and profitability are key determinants of bank failure. The study adds to the scare body of literature on bank failure among developing economies, by analyzing, developing and testing a prediction model in a developing economy like Nigeria. This study also offers recommendations for both policy and practice, especially for bank regulators and the management team on the need to monitor the profitability and liquidity position of banks.
Highlights
IntroductionThe Covid–19 pandemic has changed the global economic landscape for business organizations around the world – both small and large organizations are endangered by the pandemic
return on asset (ROA), return on equity (ROE), PAT/GE and retained earnings to total asset (RETA) are all profitability measures and highly profitable firms are expected to have a low probability of failure compared to firms with lower levels of profitability
All the profitability measures for the failed banks had negative means while that of the non-failed banks were positive, buttressing the point that profitability is negatively related to the probability of failure
Summary
The Covid–19 pandemic has changed the global economic landscape for business organizations around the world – both small and large organizations are endangered by the pandemic. This has led to a fall in oil prices, shutdown of industries and disruption of sporting and other social activities around the world. This development will likely threaten and possibly violate the going concern assumption of business entities, thereby magnifying the effect of the global crisis. Corporate failure imposes severe financial and psychological damages to affected parties and, in more extreme situations, can lead to loss of lives
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