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Financial Distress Prediction: Empirical Evidence From Indian Automobile Companies

Author

Listed:
  • Dr. S. Poornima

    () (Assistant Professor, Department of Business Management, PSGR Krishnammal College for Women, Coimbatore)

  • Theivanayaki M.

    () (Research Scholar, Department of Business Management, PSGR Krishnammal College for Women, Coimbatore)

Abstract

Financial distress is of crucial importance in financial management especially in the case of competitive environment. Failure is not an impulsive outcome and it grows constantly in stages. A spontaneous protective effort could be accommodated if the company is anticipated to be proceeding in the direction of potential bankruptcy and this can help alleviate the financial distress to all investor and decrease the costs of bankruptcy. This study extends a failure prediction model for Indian Automobile companies. This study hopes to accommodate some important results relevant to authorities and stake holders. The capability to detect potential financial problems at a premature stage is absolutely essential because it helps to ensure business, financial, economic and political environment stability. The results show good performance with a highly correct categorization factuality rate of more than 90%. Eight ratios were determined significant out of 38 financial ratios utilized in this analysis to discriminate among failed and non- failed companies. The significant variables are Operating margin (%), Gross profit margin (%), Return on long term funds (%), Total debt/equity, Cash earnings retention ratio, Exports as percent of total sales, Import companies in raw material consumed, Bonus component in equity capital (%).

Suggested Citation

  • Dr. S. Poornima & Theivanayaki M., 2012. "Financial Distress Prediction: Empirical Evidence From Indian Automobile Companies," Journal of Commerce and Trade, Society for Advanced Management Studies, vol. 7(1), pages 28-37, April.
  • Handle: RePEc:jct:journl:v:7:y:2012:i:1:p:28-37
    as

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    File URL: http://www.jctindia.org/v-7-i-1-april-2012/april-12-v-7-i-1-jct-5.pdf
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    References listed on IDEAS

    as
    1. John Y. Campbell & Jens Hilscher & Jan Szilagyi, 2008. "In Search of Distress Risk," Journal of Finance, American Finance Association, vol. 63(6), pages 2899-2939, December.
    2. Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 23(4), pages 589-609, September.
    3. Rushinek, Avi & Rushinek, Sara F., 1987. "Using financial ratios to predict insolvency," Journal of Business Research, Elsevier, vol. 15(1), pages 93-100, February.
    4. Shumway, Tyler, 2001. "Forecasting Bankruptcy More Accurately: A Simple Hazard Model," The Journal of Business, University of Chicago Press, vol. 74(1), pages 101-124, January.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Discriminant Analysis; Ratios; Indian Automobile Companies; Sales;

    JEL classification:

    • L62 - Industrial Organization - - Industry Studies: Manufacturing - - - Automobiles; Other Transportation Equipment; Related Parts and Equipment
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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