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Predicting Bankruptcy in Pakistan


  • Abdul RASHID

    (International Islamic University (IIU), Islamabad)

  • Qaiser ABBAS

    (International Islamic University (IIU), Islamabad)


This paper aims to identify the financial ratios that are most significant in bankruptcy prediction for the non-financial sector of Pakistan based on a sample of companies which became bankrupt over the time period 1996-2006. Twenty four financial ratios covering four important financial attributes, namely profitability, liquidity, leverage, and turnover ratios, were examined for a five-year period prior bankruptcy. The discriminant analysis produced a parsimonious model of three variables viz. sales to total assets, EBIT to current liabilities, and cash flow ratio. Our estimates provide evidence that the firms having Z-value below zero fall into the “bankrupt” whereas the firms with Z-value above zero fall into the “non-bankrupt” category. The model achieved 76.9% prediction accuracy when it is applied to forecast bankruptcies on the underlying sample.

Suggested Citation

  • Abdul RASHID & Qaiser ABBAS, 2011. "Predicting Bankruptcy in Pakistan," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(9(562)), pages 103-128, September.
  • Handle: RePEc:agr:journl:v:9(562):y:2011:i:9(562):p:103-128

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    References listed on IDEAS

    1. Charles M. Tiebout, 1956. "A Pure Theory of Local Expenditures," Journal of Political Economy, University of Chicago Press, vol. 64, pages 416-416.
    2. Ioan Talpos & Bogdan Dima & Cosmin Enache & Mihai Ioan Mutascu, 2005. "Agency, Associations And Culture: A Thale Of State And Society," Public Economics 0510022, EconWPA.
    3. Guido Cozzi, 1998. "Culture as a Bubble," Journal of Political Economy, University of Chicago Press, vol. 106(2), pages 376-394, April.
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    Cited by:

    1. Ijaz, Muhammad Shahzad & Hunjra, Ahmed Imran & Hameed, Zahid & Maqbool, Adnan & Azam, Rauf i, 2013. "Assessing the Financial Failure Using Z-Score and Current Ratio: A Case of Sugar Sector Listed Companies of Karachi Stock Exchange," MPRA Paper 60787, University Library of Munich, Germany.
    2. Rubina Shaheen & Attiya Yasmin Javid, 2014. "Effect of Credit Rating on Firm Performance and Stock Return; Evidence form KSE Listed Firms," PIDE-Working Papers 2014:104, Pakistan Institute of Development Economics.


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