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Theoretical and Applied Economics
No. 9 / 2011 (562)

Predicting Bankruptcy in Pakistan

Abdul RASHID
International Islamic University (IIU), Islamabad
Qaiser ABBAS
International Islamic University (IIU), Islamabad

Abstract. This paper aims to identify the financial ratios that are most significant in bankruptcy prediction for the non-financial sector of Pakistan based on a sample of companies which became bankrupt over the time period 1996-2006. Twenty four financial ratios covering four important financial attributes, namely profitability, liquidity, leverage, and turnover ratios, were examined for a five-year period prior bankruptcy. The discriminant analysis produced a parsimonious model of three variables viz. sales to total assets, EBIT to current liabilities, and cash flow ratio. Our estimates provide evidence that the firms having Z-value below zero fall into the “bankrupt” whereas the firms with Z-value above zero fall into the “non-bankrupt” category. The model achieved 76.9% prediction accuracy when it is applied to forecast bankruptcies on the underlying sample.

Keywords: bankruptcy prediction; financial ratios; Z-value; multivariate discriminate analysis; non-financial firms.

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Novum Organum Oeconomicum
Marin Dinu

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