Predicting Bankruptcy in Pakistan

Abdul Rashid () and Qaiser Abbas
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Qaiser Abbas: International Islamic University (IIU), Islamabad

Theoretical and Applied Economics, 2011, vol. XVIII(2011), issue 9(562), 103-128

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. (search for similar items in EconPapers)
Date: 2011
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