FINANCIAL RATIOS, ECONOMETRICS AND CORPORATE BANKRUPTCY – AN EMPIRICAL STUDY

Abstract

The research study focuses on the application of discriminant model in detecting corporate bankruptcy much before the actual incidence of bankruptcy. The discriminant function developed is Z = -3.4532 + 0.03605Current ratio + 0.6589Asset turnover + 3.1129Proprietary ratio. This helps in assigning ‘Z’ score to a company, which is capable of assigning a company either belonging to the group of solvent companies or to the group of bankrupt companies. By applying the discriminant function to the financial ratios of three major failures of sub-prime crisis period, that is Lehman Brothers, Bear Sterns, and Freddie Mac we find that had this model been applied in the year 2006 to 2007 than it would have alarmed about the bankruptcy of these companies well in advance and acted as ‘Whistle Blower

Keywords: Bankruptcy, Discriminant function, Eigen value, Wilks’ lamda

Unique Article ID: EJAAFR-251

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