Prediction of corporate bankruptcy: evidence from West African s SMEs

Abstract

Bankruptcy is a legal proceeding in which a corporation has become insolvent and therefore cannot pay its obligations .The purpose of this paper is to assess the default risk or to predict bankruptcy of some public firms listed on the stock Exchange Securities (BRVM) of West African Economic and Monetary Union (WAEMU) and on the Ghana Stock Exchange (GSE). 34 companies from different sectors and sizes have taken place in this study. The main purpose is to measure the performance of these companies that constitute the backbone of the regional economy whether banks or investors can have confidence on them to finance their activities. To perform this study, the 2013 dataset financial statements were taken from the website of the two stock exchanges. Then, Discriminant function named Z-scores model of Altman, financial ratio analysis, and the Principal Component Analysis were used. The results of this study show that out of the 34 public companies, only 8 companies have had good financial performance, and on which financial institutions or investors can have confidence for financing or investment. Among all the companies, the most best performing company was listed in Ghana Stock Exchange. The most problem encountered by 85% of the 34 companies was the liquidity problem. This study will permit investors and banks to put regards on these companies on one side, and to awaken those companies which have realized bad financial performances on the other side.

Does neglecting the instruments of financial failure play a role in the bankruptcy of companies?

“…In 1988, Merrick Hutchinson used Principal Components Analysis (PCA) to recognize the monetary attributes of little firms to accomplish citation on the UK unlisted securities market (Adalessossi, 2015). In 1992, Laitinen endeavored to foster a model to failure of newly founded firms (Weinzimmer et al, 1994).…”

“…His examination showed that it was conceivable, somewhat, to expect disappointment of new organizations in the principal year after establishment (Gilboa et al, 2008). He tracked down that the best-inferred indicators were the accompanying: stockholders' capital/total capital, cash flow/ net sales and cash flow/total debt (Adalessossi, 2015). The classifications include liquidity proportions, influence proportions, movement proportions, and benefit proportions (Courtis, 1978); reviewed a few investigations to recognize the factors helpful at anticipating disappointment gathered.…”

“…Another intriguing viewpoint that rises out of the utilization of proportion examination is the manner by which the proportions will be deciphered (Cielen et al, 2004). As shown by a study of Edmister, there are a few manners by which proportions can be dissected to foresee independent venture risk of financial, which include: the ratio level, the relative level of the borrower's ratio to the average ratio of other small business in the same industry (Adalessossi, 2015), before it can even consider overseeing financial risks necessary to understand what chance really is, so what does the word hazard probability and chance mean, as well as disappointment (Bouali et al, 2020) and misfortune. These standard terms can be described as the impact of vulnerability on targets, that is, a hazard is any deviation that may happen based on what was generally anticipated with regards to monetary danger (Dimitras et al, 1996).…”

Assessment of Bankruptcy Risk of Large Companies: European Countries Evolution Analysis

“…Principal Component Analysis (PCA), the statistical procedure that uses an orthogonal transformation to convert a set of observations of possibly correlated variables into a set of values of linearly uncorrelated variables called principal components started to be used in analysis and prediction of bankruptcy risk. Adalessossi (2015) used discriminant function named Z-scores model of Altman, financial ratio analysis, and the principal component analysis on a sample of 34 listed companies from different sectors and sizes in order to find out if the three methods used in this study converge toward similarity results. The comparison of the three methods indicates unanimously that, out of the 34 companies, only eight companies have had the best financial performances and are not likely to go on to bankruptcy.…”