Corporate Bankruptcy: Assessment, Analysis and Prediction of Financial Distress, Insolvency, and Failure

Abstract

This paper is divided into three sections that address the various elements of understanding, predicting and analyzing corporate failure and bankruptcy. Part I covers the definitions of corporate failure, explains the bankruptcy process and then classifies various potential causes of failure into broad categories. The causes are bifurcated into company-specific versus external factors. The company-specific factors include an in depth discussion and analysis of business causes versus financial causes, as well as the interrelation between the two. The most important factors, such as financial and operating leverage, are explored in great detail to gain a better understanding of their implications and impact on corporate failure. Part II covers various approaches for analyzing corporate risk and predicting corporate failure. It first details the credit analysis process from the perspective of lenders and credit agencies as a method for credit evaluation and prediction of default. Then, it provides an in depth explanation of financial ratio analysis as a prediction method and provides an overview of the main statistical prediction models. It concludes with a discussion of the implications of the model findings with respect to the causes detailed in Part I. Lastly, Part III describes the outcome of the study performed to analyze the causes of failure as described in Part I by using a combination of the methods highlighted in Part II. The purpose of the study is to identify the sequence and magnitude of relative ratio deterioration in failed firms in order to establish the relative frequency of the various categories of causes of failure. Various ratios and metrics were used as proxies for relative liquidity complications, profitability issues, business problems, and leverage concerns. The impact of macroeconomic events is also evaluated by isolating the impact of the

دور رأی مراقب الحسابات بشأن استمراریة الشرکة وخصائص مراقب الحسابات فی التنبؤ بإفلاس الشرکات: أدلة من الشرکات المقیدة فی البورصة المصریة (باللغة الانجلیزیة)

“…Theoretically, there would be sufficient proceeds resulting from assets' sale to pay off all credit holders totally if the firm were to be liquidated. In spite of positive net worth, the firm cash is not sufficient to satisfy short term liabilities (Danilov, 2014).…”

“…From the accounting perspective, it refers to the case when the market value of the firm's assets is less than its liabilities and hence, its net worth is negative and credit holders will not be paid back fully when the firm is liquidated. From the legal perspective, it refers to the state when the firm files for bankruptcy in court which would lead to either firm liquidation or firm reorganization depending on the economic value of the firm's assets (Altman & Hotchkiss, 2010;Danilov, 2014).…”

“…On the other hand, higher levels of debt or operating expenses raise the distress likelihood through reducing the reservoir. Accordingly, the ratios that reflect the elements of the reservoir must differ, on average, between distressed and nondistressed firms (Beaver, 1966;Danilov, 2014).…”

“…Thirdly, Beaver et al (2005) reveal that there is actually a minor drop in financial ratios' predictive performance over time because of greater managerial discretion or because of greater amounts of intangible assets (Danilov, 2014). Finally, bankruptcy prediction models based on financial ratios implicitly presume that all relevant failure or success indicators-both internal and external-are reflected in the accounting figures.…”

Financial Distress Prediciton on Property, Construction, and Real Estate Companies Listed in BEI

“…Analisis diskriminan dapat digunakan untuk mengetahui adanya tanda-tanda kesulitan keuangan dari suatu perusahaan dengan terlebih dahulu mengumpulkan rasio-rasio keuangan dari perusahaan tersebut. Secara umum rasio-rasio tersebut dapat dikategorikan ke dalam empat macam kategori yaitu rasio likuiditas, rasio profitabilitas, rasio aktivitas, dan rasio solvabilitas (Danilov, 2014).…”