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THE SIGNIFICANCE OF BASE YEAR IN DEVELOPING FAILURE PREDICTION MODELS
Author(s) -
Hennawy R.H.A.,
Morris R.C.
Publication year - 1983
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/j.1468-5957.1983.tb00424.x
Subject(s) - bankruptcy , bankruptcy prediction , linear discriminant analysis , actuarial science , business failure , sample (material) , financial ratio , predictive modelling , econometrics , economics , statistics , finance , mathematics , chemistry , chromatography
Most failure prediction models developed over the past fifteen years have been based on firms' financial characteristics one year before they collapsed. This article reports the results of a study employing multiple discriminant analysis on a sample of fifty‐three British companies which failed over the period 1960–1971. Models were developed on various financial ratios and an industry indicator for each of the five years, prior to failure, and the results in fact show that the model developed from data five years before failure performed at least as well as that derived one year prior to bankruptcy.