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On the Financial Applications of Discriminant Analysis

Author

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  • Joy, O. Maurice
  • Tollefson, John O.

Abstract

In recent years the application of discriminant analysis to two-category (dichotomous) classification problems in empirical financial research has substantially increased. However, these studies have given relatively little attention to design and interpretation difficulties associated with discriminant analysis. Consequently, the conclusions and generalizations that can be drawn from such studies are frequently tenuous and questionable. This paper's purpose is to discuss the methodology of discriminant analysis. While the paper is oriented toward financial applications of discriminant analysis, our discussion is not peculiar to finance. Furthermore, many of the methodological issues we address are relevant to the general problem of developing and testing dichotomous classification models and arise whether model developing is by discriminant analysis or some other method.

Suggested Citation

  • Joy, O. Maurice & Tollefson, John O., 1975. "On the Financial Applications of Discriminant Analysis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 10(5), pages 723-739, December.
  • Handle: RePEc:cup:jfinqa:v:10:y:1975:i:05:p:723-739_01
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    Cited by:

    1. Petr Jakubík & Petr Teplý, 2011. "The JT Index as an Indicator of Financial Stability of Corporate Sector," Prague Economic Papers, Prague University of Economics and Business, vol. 2011(2), pages 157-176.
    2. John W. Pacey & Toan M. Pham, 1990. "The Predictiveness of Bankruptcy Models: Methodological Problems and Evidence," Australian Journal of Management, Australian School of Business, vol. 15(2), pages 315-337, December.
    3. Iatridis, George, 2010. "International Financial Reporting Standards and the quality of financial statement information," International Review of Financial Analysis, Elsevier, vol. 19(3), pages 193-204, June.
    4. Leredde, Henri & Outreville, J.-François, 1981. "Un exemple de l’utilisation des méthodes de l’analyse des données dans la démarche scientifique en économie," L'Actualité Economique, Société Canadienne de Science Economique, vol. 57(4), pages 507-524, octobre-d.
    5. Alessandra Amendola & Francesco Giordano & Maria Lucia Parrella & Marialuisa Restaino, 2017. "Variable selection in high‐dimensional regression: a nonparametric procedure for business failure prediction," Applied Stochastic Models in Business and Industry, John Wiley & Sons, vol. 33(4), pages 355-368, August.
    6. Izan, H. Y., 1984. "Corporate distress in Australia," Journal of Banking & Finance, Elsevier, vol. 8(2), pages 303-320, June.
    7. Orbeta, Aniceto Jr. C. & Llanto, Gilberto M., 1992. "Identification and Classification of Problem Banks," Philippine Journal of Development JPD 1992 Vol. XIX No.1-e, Philippine Institute for Development Studies.
    8. Mauro Paoloni & Massimiliano Celli, 2018. "Crisi delle PMI e strumenti di warning. Un test di verifica nel settore manifatturiero," MANAGEMENT CONTROL, FrancoAngeli Editore, vol. 2018(2), pages 85-106.
    9. George Emmanuel Iatridis & Nathan Lael Joseph, 2006. "Characteristics of UK firms related to timing of adoption of Statement of Standard Accounting Practice No. 20," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 46(3), pages 429-455, September.
    10. Ostermark, Ralf & Hoglund, Rune, 1998. "Addressing the multigroup discriminant problem using multivariate statistics and mathematical programming," European Journal of Operational Research, Elsevier, vol. 108(1), pages 224-237, July.
    11. Jason J. Constable & David R. Woodliff, 1994. "Predicting Corporate Failure Using Publicly Available Information," Australian Accounting Review, CPA Australia, vol. 4(7), pages 13-27, May.
    12. Iatridis, George Emmanuel, 2011. "Accounting disclosures, accounting quality and conditional and unconditional conservatism," International Review of Financial Analysis, Elsevier, vol. 20(2), pages 88-102, April.
    13. Layla Khoja & Maxwell Chipulu & Ranadeva Jayasekera, 2016. "Analysing corporate insolvency in the Gulf Cooperation Council using logistic regression and multidimensional scaling," Review of Quantitative Finance and Accounting, Springer, vol. 46(3), pages 483-518, April.
    14. P. S. Sudarsanam, 1995. "The role of defensive strategies and ownership structure of target firms: Evidence from UK hostile takeover bids," European Financial Management, European Financial Management Association, vol. 1(3), pages 223-240, November.
    15. Chung, Joseph & To, Minh Chau & Thrin, Minh Anh, 1982. "Une mesure composite du risque des prêts hypothécaires," L'Actualité Economique, Société Canadienne de Science Economique, vol. 58(4), pages 463-476, décembre.
    16. Kurt M. Fanning & Kenneth O. Cogger, 1994. "A Comparative Analysis of Artificial Neural Networks Using Financial Distress Prediction," Intelligent Systems in Accounting, Finance and Management, John Wiley & Sons, Ltd., vol. 3(4), pages 241-252, December.
    17. Dimitras, A. I. & Zanakis, S. H. & Zopounidis, C., 1996. "A survey of business failures with an emphasis on prediction methods and industrial applications," European Journal of Operational Research, Elsevier, vol. 90(3), pages 487-513, May.
    18. Nan Hu & Jian Li & Alexis Meyer-Cirkel, 2019. "Completing the Market: Generating Shadow CDS Spreads by Machine Learning," IMF Working Papers 19/292, International Monetary Fund.
    19. Ronald G. Storey & Cecil R. Dipchand, 1978. "Factors Related To The Conversion Record Of Convertible Securities: The Canadian Experience 1946–1975," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 1(1), pages 71-83, December.
    20. Jones, Stewart & Johnstone, David & Wilson, Roy, 2015. "An empirical evaluation of the performance of binary classifiers in the prediction of credit ratings changes," Journal of Banking & Finance, Elsevier, vol. 56(C), pages 72-85.
    21. Joseph, Nathan Lael, 2000. "The choice of hedging techniques and the characteristics of UK industrial firms," Journal of Multinational Financial Management, Elsevier, vol. 10(2), pages 161-184, June.
    22. McGurr, Paul T. & DeVaney, Sharon A., 1998. "Predicting Business Failure of Retail Firms: An Analysis Using Mixed Industry Models," Journal of Business Research, Elsevier, vol. 43(3), pages 169-176, November.
    23. George Iatridis & Panayotis Alexakis, 2012. "Evidence of voluntary accounting disclosures in the Athens Stock Market," Review of Accounting and Finance, Emerald Group Publishing, vol. 11(1), pages 73-92, February.
    24. Maurice Peat, 2001. "Bankruptcy Probability: A Theoretical and Empirical Examination," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 20, July-Dece.

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