THE POTENTIAL OF THE DEBT RATIO IN THE PREDICTION OF CORPORATE BANKRUPTCY

Daniel Brindescu-Olariu ()
Additional contact information
Daniel Brindescu-Olariu: West University, contact@levier.ro, Timisoara, Romania,

Journal of Public Administration, Finance and Law, 2015, vol. s2, issue Special issue 2, 37-45

Abstract: The current study evaluates the potential of the debt ratio in predicting corporate bankruptcy. The population subjected to the analysis included all companies form Timis County with yearly sales of over 2200 Euros. The interest for the debt ratio was based on the recommendations of the scientific literature, as well as on the availability of information concerning its values to all stakeholders. The event on which the research was focused was represented by the manifestation of bankruptcy 2 years after the date of the financial statements of reference. All tests were performed over a paired sample of 1424 companies. The methodology employed in evaluating the potential of the debt ratio was based on the general accuracy ensured by the ratio (61.8%) and the Area under the ROC Curve (0.644). The results suggest limited practical utility of the debt ratio in the prediction of bankruptcy within a simple univariate analysis. This conclusion shows that, although the general belief is that high debt ratios are the main cause of corporate bankruptcy, the use of the debt ratio alone for the prediction of corporate bankruptcy leads to relatively poor results. It is expected that the inclusion of the debt ratio within multivariate models for bankruptcy prediction would exploit its potential more fully.

Keywords: Corporate finance; Risk; Failure; Financial ratio; Financial analysis; Classification accuracy (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.jopafl.com/uploads/special-issue-2-2015 ... ORATE_BANKRUPTCY.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:aic:jopafl:y:2015:v:s2:p:37-45

Access Statistics for this article

More articles in Journal of Public Administration, Finance and Law from Alexandru Ioan Cuza University, Faculty of Economics and Business Administration Contact information at EDIRC.
Bibliographic data for series maintained by Sireteanu Napoleon-Alexandru ().