Failure Prediction: Evidence from Korea

Failure Prediction: Evidence from Korea This study is an attempt to construct and test a distress classification model for Korean companies. Utilizing a sample of 34 distressed firms from the recent 1990‐1993 period and a matched (by industry and year) sample of non‐failed firms, we observe the classification accuracy of two models. Both models utilize measures of firm size, asset turnover, solvency and leverage with one model available for testing only on publicly traded companies and one model applicable to all public and private entities. We observe excellent classification accuracy based on data from the first two years prior to distress. And, although the accuracy drops off after t‐2, the models still provide effective early warnings of distress in many cases. The results of this study are of particular relevance in the current financial market scenario of increased deregulation and greater individual financial institution decision making. It is somewhat ironic for us to be proposing the use of a financial distress early‐warning model given the current robust economic growth and low bankruptcy rate in Korea. But, the financial problems in Japan are a sobering reminder that high growth can be followed by financial excesses, increased business failures and large loan losses. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of International Financial Management & Accounting Wiley
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Publisher
Wiley Subscription Services, Inc., A Wiley Company
Copyright
Copyright © 1995 Wiley Subscription Services, Inc., A Wiley Company
ISSN
0954-1314
eISSN
1467-646X
D.O.I.
10.1111/j.1467-646X.1995.tb00058.x
Publisher site
See Article on Publisher Site

Abstract

This study is an attempt to construct and test a distress classification model for Korean companies. Utilizing a sample of 34 distressed firms from the recent 1990‐1993 period and a matched (by industry and year) sample of non‐failed firms, we observe the classification accuracy of two models. Both models utilize measures of firm size, asset turnover, solvency and leverage with one model available for testing only on publicly traded companies and one model applicable to all public and private entities. We observe excellent classification accuracy based on data from the first two years prior to distress. And, although the accuracy drops off after t‐2, the models still provide effective early warnings of distress in many cases. The results of this study are of particular relevance in the current financial market scenario of increased deregulation and greater individual financial institution decision making. It is somewhat ironic for us to be proposing the use of a financial distress early‐warning model given the current robust economic growth and low bankruptcy rate in Korea. But, the financial problems in Japan are a sobering reminder that high growth can be followed by financial excesses, increased business failures and large loan losses.

Journal

Journal of International Financial Management & AccountingWiley

Published: Dec 1, 1995

References

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