Predicting Insolvency of the Construction Companies in the Creditworthiness Assessment Process—Empirical Evidence from Poland

Rafał Balina,Marta Idasz-Balina,Noer Azam Achsani

doi:10.3390/jrfm14100453

Abstract

Prediction insolvency is one of the most important issues during creditworthiness assessment, especially in the turmoil environment. That is why the problem of insolvency and bankruptcy prediction has been the subject of numerous studies focused on its causes, consequences, and prediction. The main goal of the study was to develop a prediction model that can be effectively used in practice to analyze and signal the risk of insolvency and bankruptcy of a construction firms. Also, the research must identify the key factors that would allow for early identification of the symptoms of the upcoming financial failure of companies from a construction sector. To reach the goal of the study discriminant analysis, logistic regression and classification trees were used. The final estimated models included nine variables related to the profitability; revenues; liquidity; asset’s structure; and dynamics of own and foreign capitals, some of which referred to the industry and market situation in a construct sector, which is a novelty compared to previous research. What is more, results show that the method chosen to estimate the insolvency prediction model could have an impact on both partial and general effectiveness in the process of creditworthiness assessment.

Highlights

The construction industry is an important part of the Polish economy, as it generates from several to a dozen percent of Poland’s Gross Domestic Product (GDP) (Rozkrut et al 2020)
The paper considers the use of industry variables and the market situation in the construction industry as an element to better predict the insolvency risk of construction companies
The article deals with an important issue of forecasting the risk of insolvency of companies from the construction industry, which is one of the most important pillars of the economy in many countries around the world

Summary

Introduction

The construction industry is an important part of the Polish economy, as it generates from several to a dozen percent of Poland’s GDP (Rozkrut et al 2020). Considering the strong linkage of the construction sector with other branches, it can be assumed that the impact of this sector on the generation of Poland’s gross domestic product is much higher. The construction sector has been considered as one of the most significant sectors in the economies of all countries. Its significant impact on generating Gross Domestic Product (GDP) and the construction sector has important social functions—one of them is affecting the quality of life of the local community. Employment of 100 people in the construction sector creates at least 200 new jobs and stimulates production in other industries (Bolkowska 2006)

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Conclusion