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Building a Scoring Model for Bankruptcy Risk Prediction on Multiple Discriminant Analysis

Author

Listed:
  • Vintila Georgeta

    () (Academy of Economic Studies, Bucharest)

  • Toroapa Maria Georgia

    () (Academy of Economic Studies, Bucharest)

Abstract

The purpose of this paper is to use discriminant analysis to substantiate a score function effective in bankruptcy risk prediction of enterprises on Romanian economy example. For achieving discrimination between bankrupt and non-bankrupt in the scoring model we used relevant financial ratios related to activity, liquidity, leverage and profitability. The weighting coefficients established between independent variables and the objective function-score, are determined by using optimization, through a solver in Excel, with four financial ratios as input:return on revenue, cash-flow to debt ratio, debt to assets ratio, total debt payment period. Based on financial information submitted for 2009, the analysis was conducted on a sample of companies listed on the Bucharest Stock Exchang and achieved a success rate for the scoring model. The results in this article can be used to observe the evolution of a Romanian company over time, to make an idea about curent and future financial situation, and take, if necessary, corrective measures.

Suggested Citation

  • Vintila Georgeta & Toroapa Maria Georgia, 2011. "Building a Scoring Model for Bankruptcy Risk Prediction on Multiple Discriminant Analysis," Ovidius University Annals, Economic Sciences Series, Ovidius University of Constantza, Faculty of Economic Sciences, vol. 0(1), pages 2283-2288, May.
  • Handle: RePEc:ovi:oviste:v:11:y:2011:i:1:p:2283-2288
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    More about this item

    Keywords

    discriminant analysis; bankruptcy; prediction; financial ratios; score;

    JEL classification:

    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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