Bankruptcy prediction model for listed companies in Greece

Abstract

This paper deals with the ever-increasing issue of bankruptcy prediction in distressed economies. Specifically, the aim of this study is to create a model by establishing a new set of predictor variables, which achieves significant discrimination among listed manufacturing firms in Greece, by using multivariate discriminant analysis (MDA). An equally balanced matched sample of 28 Greek-listed manufacturing firms was used in this study covering the distressed period from 2008 to 2015 (including all firms that went bankrupt between 2008–2015). It is found that the quick ratio, cash flow interest coverage, and economic value added (EVA) divided by total assets are significant for predicting bankruptcy in Greece. The discriminant analysis (DA) model comprised the aforementioned variables and correctly classified 96.43% of grouped cases 1 year before bankruptcy. The adjusted DA prediction model for two and three years before bankruptcy used the same variables and correctly classified 92.86% and 89.29% of grouped cases, respectively. Consequently, this mix of financial ratios achieved strong classification accuracy even three years before bankruptcy, captivating an overall picture of a firm’s financial health and providing a powerful tool for decision making to investors and risk managers in the banking section and economic policy makers.