Predicting corporate failure of Malaysians listed companies: Comparing multiple discriminant analysis, logistic regression and the hazard model

Abstract

This study compares three methodologies for identifying financially distressed companies, multiple discriminant analysis (MDA), logistic regression and hazard model. In a sample of 52 distressed and non-distressed companies with a holdout sample of 20 companies, the predictions of the hazard model were accurate in 94.9 % of the cases examined. This was a higher accuracy rate than generated by the other two methodologies.However, when the holdout sample is included in the sample analyzed, MDA had the highest accuracy rate at 85%. Among the ten determinants of corporate performance examined, the ratio of debt to total assets was a significant predictor of corporate distress regardless of the methodology used. In addition, net income growth was another significant predictor in MDA, whereas the return on assets was an important predictor when the logistic regression and hazard model methodologies were used.

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