Prediction of corporate financial distress in an emerging market: the case of Turkey

Abstract

PurposeTo identify predictors of corporate financial distress, using the discriminant and logit models, in an emerging market over a period of economic turbulence and to reveal the comparative predictive and classification accuracies of the models in this different environmental setting.Design/methodology/approachThe research relies on a sample of 27 failed and 27 non‐failed manufacturing firms listed in the Istanbul Stock Exchange over the 1996‐2003 period, which includes a period of high economic growth (1996‐1999) followed by an economic crisis period (2000‐2002). The two well‐known methods, discriminant analysis and logit, are compared on the basis of a better overall fit and a higher percentage of correct classification under changing economic conditions. Furthermore, this research attempts to reveal the changes, if any, in the bankruptcy predictors, from those found in the earlier studies that rested on the data from the developed markets.FindingsThe logistic regression model is found to have higher classification power and predictive accuracy, over the four years prior to bankruptcy, than the discriminant model. In this research, the discriminant and logit models identify the same number of significant predictors out of the total variables analyzed, and six of these are common in both. EBITDA/total assets is the most important predictor of financial distress in both models. The logit model identifies operating profit margin and the proportion of trade credit within total claims ratios as the second and third most important predictors, respectively.Originality/valueThis paper reveals the accuracy with which the discriminant and logit models work in an emerging market over a period when firms face high uncertainty and turbulence. This study may be extended to other emerging markets to eliminate the limitation of the small sample size in this study and to further validate the use of these models in the developing countries. This can serve to make the methods important decision tools for managers and investors in these volatile markets.

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“…3; asset fluidity of enterprises mainly is composed by capital flow and cash flow. Smith (1980) and Ugurlu and Aksoy (2006) ever proved the similar point. Asset fluidity can sufficiently react the debt-paying ability, liquid asset ability, and capital receivable ability of enterprises.…”

“…Huyhebaert, Gaeremynck, Roodhooft, and Va nde (2000) think that cash flow is more precisely to assess the debt-paying ability of enterprises. Ugurlu and Aksoy (2006), Saleem and Rehman (2011) indicates that cash flow and variation change all can present the asset liquidity of one enterprise. Asset liquidity and enterprise's profits have very obvious connection.…”

“…Ozdagli (2012) indicates financial leverage can be used to judge the relation between debt management of enterprises and the financial risk degree. Laster (2003), Ugurlu and Aksoy (2006) all think that financial leverage is the important risk index to show the debt-paying ability of enterprises. Ugurlu and Aksoy (2006) also indicate that the market risk and turbulence, which are caused by economy environment, also affect the debt-paying ability of enterprises.…”

“…Laster (2003), Ugurlu and Aksoy (2006) all think that financial leverage is the important risk index to show the debt-paying ability of enterprises. Ugurlu and Aksoy (2006) also indicate that the market risk and turbulence, which are caused by economy environment, also affect the debt-paying ability of enterprises. The variation of economic environment includes stock price, interest, exchange rate, national regulation and the change of policy.…”

“…Besides, efficiency improvement also can help enterprises to increase profitability, especially cost efficiency. Ugurlu and Aksoy (2006) indicate the supervisors of enterprises should focus on cost efficiency increasing in order to improve profitability. Cost efficiency is to calculate the results of input and output of enterprises after comparing with same industries.…”