A new dynamic geometric approach for empirical analysis of financial ratios and bankruptcy

Abstract

This paper presents a complementary technique for the empiricalanalysis of financial ratios and bankruptcy risk using financialratios. Within this new framework, we propose the use of a newmeasure of risk, the Dynamic Risk Space (DRS) measure. We provideevidence of the extent to which changes in values for this indexare associated with changes in each axis's values and how this mayalter our economic interpretation of changes in patterns anddirections. In addition, this model tends to be generally usefulfor predicting financial distress and bankruptcy. This methodwould be a general methodological guideline associated withfinancial data, solving some methodological problems concerningfinancial ratios such as non-proportionality, non-asymmetry andnon-scaled. To test the procedure, Multiple Discriminant Analysis(MDA), Logistic Analysis (LA) and Genetic Programming (GP) areemployed to compare results by common and modified ratios forbankruptcy prediction. Classification methods outperformed usingthe DRS approach.

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