Soo, Wah Low and Mat Nor, Fauzias and Yatim, Yatim
(2001)
Predicting Corporate Financial Distress Using The Logit
Model: The Case Of Malaysia.
Asian Academy of Management Journal (AAMJ), 6 (1).
pp. 1-13.
ISSN 1394-2603
Abstract
This study examines the usefulness of financial ratios in predicting the probability of
financial distress in companies. These financially troubled companies have obtained
court protection against their creditors under Section 176 of the Malaysian Companies
Act, 1965. The findings suggest that the fairly popular ratios of liquidity and
profitability maybe somewhat deceiving. Interpretation of these two measures should
be made carefully because high ratios by themselves do not necessarily imply that the
company has sufficient money to pay its obligations. It is shown that the cash position
of a company provides a better warning signal of financial deterioration and therefore
should be emphasized in detecting financially distressed companies. The predictive
ability of the model is tested on a holdout sample and the overall accuracy rate for the
estimation and the holdout samples are 82.4% and 90% respectively. The findings
provide a better understanding on the relevant factors that lead to corporate distress so
that prompt actions could be taken to minimize the risk of financial distress.
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