Apply logit analysis in bankruptcy prediction

  • Authors:

  • Ying Zhou;Taha M. S. Elhag

  • Affiliations:

  • Department of Management of Projects, School of Mechanical, Aerospace and Civil Engineering, The University of Manchester, Manchester, United Kingdom;Department of Management of Projects, School of Mechanical, Aerospace and Civil Engineering, The University of Manchester, Manchester, United Kingdom

  • Venue:
  • SMO'07 Proceedings of the 7th WSEAS International Conference on Simulation, Modelling and Optimization
  • Year:
  • 2007

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Abstract

Signs of a potential business bankruptcy are evident well before actual bankruptcy occurs. For managers, creditors, and all other concerned parties this lag allows time to take remedial action. Therefore, building models, which signal approaching financial failure, have been an important part of corporate finance literature, in order to help management refocus their energy, revaluate their corporate strategy and eliminate losses. This paper reviews the literature of bankruptcy prediction and the decision process of Logit analysis. Setting the optimized cut-off point process is employed in this study; and in-sample t test is chosen to examine the selected predictors. A four-variable Logit model, resulting from a forward-stepwise selection procedure, were built up in this study, it correctly predicted 81% with 92% type I error, 70% type II error from 100 matched-samples 1 year prior to bankruptcy.