How well do financial ratios and
multiple discriminant analysis predict company failures in Malaysia.
After reviewing the 86 studies, the study concluded that
multiple discriminant analysis is the number one and binary regression (logit analysis) is the second among sixteen techniques for developing a new bankruptcy prediction model used by the Altman's (1968) and Ohlson's (2010) were two best and efficient.
In the
multiple discriminant analysis, which aims to detect the discriminative ability or explanatory power of the variables, we used the SPSS[R] software, which generates a discriminant function and the eigenvalue of the data.
Therefore PLS can be used to operationalize a confirmatory form of
multiple discriminant analysis. However, given the current computer programs available for PLS, the operationalization of this approach is cumbersome and will not be discussed here.
A summary of the step-wise
multiple discriminant analysis is shown in Table II.
Table 2
Multiple Discriminant Analysis Summary Equivalent Step Variable Entered Wilk's Lambda F P 1 Attitude Toward Employment .86 13.00 .001 2 Attitude Towed Seeking and .84 7.42 .001 Receiving Services (*) 3 Self-Esteem and Attitude Toward Self .83 5.28 .001 * No other Variables included after Step 3 due to insufficient tolerance
The traditional approach and present standard for predicting financial distress uses
multiple discriminant analysis (MDA) to weight the relative value of information provided by a combination of financial ratios.(1) But MDA has been sharply criticized because the validity of its results hinges on restrictive assumptions (Werbos |37~, Eisenbeis |11~, Altman and Eisenbeis |3~, Scott |29~, Tollefson and Joy |32~, Sheth |31~, Ohlson |26~, Pinches |27~, Zmijewski |41~, Zavgren |39~, Karels and Prakash |17~, and Odom and Sharda |25~).
Chief among these methods have been multiple regression analysis,
multiple discriminant analysis and gravity models.
Altman's concept which analyzes various financial ratios using
multiple discriminant analysis to predict corporate bankruptcy and James Kristy's Commercial Credit Matrix which involves the following ratios: current, quick, cash, equity/debt, and return on equity.