Assessing corporate financial distress in South Africa
Date
2011-11-10
Authors
Hlahla, Bothwell Farai
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Abstract
This study develops a bankruptcy prediction model for South African companies listed on the Johannesburg Stock Exchange. The model is of considerable efficiency and the findings reported extend bankruptcy literature to developing countries. 64 financial ratios for 28 companies, grouped into failed and non-failed companies, were tested using multiple discriminant analysis after conducting normality tests. Three variables were found to be significant which are: Times Interest Earned, Cash to Debt and Working Capital to Turnover. The model correctly classified about 75% of failed and non-failed in the original and cross validation procedures. This study went on to conduct an external validation of the model superiority by introducing a sample of failed companies, which showed that the model predictive accuracy is more than chance.
Despite the popularity of the topic among researchers this study highlighted the importance and relevance of the topic to corporate managers, policy makers and to investors especially in a developing market perspective, thereby contributing significantly towards understanding the factors that lead to corporate bankruptcy.
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Keywords
Corporate financial distress, Financial ratios, Prediction model, Multi discriminant analysis