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Theoretical and Applied Economics
No. 5 / 2013 (582)

Early warning models of financial distress. Case study of the Romanian firms listed on RASDAQ

Mădălina Ecaterina ANDREICA
The Bucharest University of Economic Studies

Abstract. In this paper we design an early warning model for Romanian distressed firms. The logit model was built based on financial ratios of 66 Romanian firms listed on RASDAQ that were facing financial difficulties in 2011. In addition, we identified the main principal components obtained with minimum loss of information after applying the principal component analysis and proposed a new estimation of the logit model by replacing the initial set of input data matrix with the main principal components of the financial observations. The results indicated an increase with 12 percentage points in the performance of the one year ahead prediction of financial distress of the new warning model.

Keywords: distress prediction; financial crisis; logit model; principal component analysis.

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