Business Failure Prediction: An emperical study based on Survival Analysis and Generalized Linear Modelling (GLM) Techniques

Alhassan Bunyaminu

International Journal of Financial Economics, 2015, vol. 4, issue 3, 135-149

Abstract: This study investigated business failure using financial (ratios) and non-financial factors of listed companies on Ghana Stock Exchange. A combination of quantitative and qualitative variables have been used to predict corporate failure. Quantitatively, the study used 19 corporate determinants as predictors of business failure of listed companies on the Ghana Stock Exchange. The qualitative analysis used managerial (non-financial) factors to determine the success or otherwise of a business. An initial sample of 22 companies was divided into 70% estimation sample, 30% holdout sample and the overall prediction for a cumulative three-year data set.The study used the Cox proportional Hazard of Survival analysis technique and Generalised Linear Modelling (GLM) to predict business failure with an appreciable degree of accuracy. To reduce the dimentionality of the initial data space, the study initially used Factor Analysis(FA) by transforming a number of possibly correlated variables into a smaller number of uncorrelated variables called factor components. The study further employed Generalised Linear Modelling (GLM) with its three link functions-the Logit model, the Probit model and the Complementary log-log (Clog-log) function. Among the three link functions of GLM, the logit model provides the highest overall accuracy with the lowest Akaike Information Criteria (AIC): 46.456. The study reveals that among corporate determinants, the most significant variables that appear as consistent indicators of financial distressed companies in the superior model (logit model) are Profitability ratio (Return on total assets) and Leverage ratio (Solvency, Gearing and Interest cover). In connection with non-financial (managerial) factors used in the study, the study finds age and years of experience of managers as significant factors contributing to survival. The study recommends that future research should focus on business failure prediction that is based on tri-dimensional approach instead of the binary classification approach.

Keywords: Distressed companies; Non-Distressed companies; Principal Component Analysis; Dichotomous approach; Generalized Linear Modelling; multi-state approach; Survival Analysis. (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (1)

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