Financial Ratios, Discriminant Analysis and the Prediction of Corporate BankruptcyANKRUPTCY – ARTICLE SUMMARY

In 1968, Edward Altman wrote the article "Financial Ratio, Discriminant Analysis, and Corporate Bankruptcy Prediction". The purpose of this paper is to solve the quality of ratio analysis as analytical technique. At that time, some scholars turned to statistical analysis apart from ratio analysis. In this paper, we decide whether to continue or eliminate ratio analysis, replace it with statistical analysis, or use statistical analysis as a cofactor for financial analysis.

In this article we will use data mining techniques to predict business failure. First, we used four single classifiers - discriminant analysis, logistic regression, neural network, and C 5.0 - each based on two feature selection methods for predicting enterprise failure. Between the two feature selection methods - human judgment based on financial theory and ANOVA statistical method - we found that ANOVA method is superior to human judgment method in all classifiers except discriminant analysis . For each classifier the decision tree and the neural network were found to provide better results. Finally, to improve the predictive performance, a hybrid approach was developed that combines the best features of several classification models. Empirical testing shows that this hybrid method yields higher prediction accuracy than a single classifier.

In 1968, Edward Altman wrote the article "Financial Ratio, Discriminant Analysis, and Corporate Bankruptcy Prediction". The purpose of this paper is to solve the quality of ratio analysis as analytical technique. At that time, some scholars turned to statistical analysis apart from ratio analysis. In this paper, we decide whether to continue or eliminate ratio analysis, replace it with statistical analysis, or use statistical analysis as a cofactor for financial analysis.

Financial statements and ratio analysis are extremely useful for corporate finance and provide analysts, managers, shareholders and creditors with a wealth of information on the company's financial situation. Ratio analysis has some drawbacks, but in fact the advantage surely outweighs its drawbacks and provides a valuable tool for nurturing prosperous companies.