Corporate Bankruptcy Prediction In Pakistan By Employing Multiple Discriminant Analysis Technique

Abstract

Aim of this paper is to focus on the utility of traditional financial ratios for predicting bankruptcy of corporate sector of Pakistan. Symptoms of bankruptcy can be judged in any firm long time before. Therefore, a number of methods were developed by researchers to predict and overcome the matter of bankruptcy. Study on Corporate sector of Pakistan was carried out for the period of 2001 to July 2015. Sixteen financial ratios covering different aspects of firms’ profitability, solvency, liquidity position and operational activity were tested as predictive variables for four operating years before bankruptcy. A total number of 38 companies were examined into two equally distributed groups (bankrupt and non-bankrupt group). Financial data were collected from official website of Karachi Stock Exchange and from balance sheets of these institutions published by State Bank of Pakistan. Variables from Altman’s (1993) revised model were taken into account for the study and weight factor is re-estimated. Simultaneously on the other hand Multiple Discriminant Analysis (MDA) techniques are employed to generate a new model for bankruptcy prediction. Altman’s (1993) re-estimated model when employed on failed and non-failed Pakistani firms proved 78.9% and a newly developed model proved 71.1% bankruptcy prediction.  

Keywords: corporate sector; bankruptcy prediction; MDA; financial ratios; Altman’s (1993) model; Pakistan.