Articlegreen2009

Predicting corporate failure: some empirical evidence from the UK

Kingsley Opoku Appiah · Joshua Yindenaba Abor

35 citations0/0 files storedBenchmarking An International Journal

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Financial Distress and Bankruptcy Prediction Financial Analysis and Corporate Governance Corporate Insolvency and Governance

Abstract

Purpose The purpose of this paper is to use relevant financial information of private medium‐sized failed and non‐failed manufacturing firms in the UK, during the period 1994‐2004 to determine whether corporate failure can be predicted by developing a Z‐score model. Design/methodology/approach Multiple discriminant analysis is used to develop the Z‐score to support the notion that Z‐score is an innovation to overcome the numerous difficulties associated with using single ratios to measure companies' health or risk of failure. Findings This paper advances the notion that the net profit margin is superior to the gross profit margin in discriminating between failed and non‐failed UK manufacturing companies in terms of its significant contribution to the Z‐score, though the latter exceeds the former slightly using the univariate analysis. Originality/value This research contributes to the area of benchmarking by providing a method to more accurately predict corporate failure.

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References

1968FINANCIAL RATIOS, DISCRIMINANT ANALYSIS AND THE PREDICTION OF CORPORATE BANKRUPTCY 1966Financial Ratios As Predictors of Failure 1977ZETATM analysis A new model to identify bankruptcy risk of corporations 1986Predicting takeover targets 1972A Discriminant Analysis of Predictors of Business Failure 200535 years of studies on business failure: an overview of the classic statistical methodologies and their related problems 1972An Empirical Test of Financial Ratio Analysis for Small Business Failure Prediction 2003Learning About Failure: Bankruptcy, Firm Age, and the Resource-Based View

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