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

Abstract

Purpose

To 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/approach

The 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.

Findings

The 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/value

This 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.

Citation

Uğurlu, M. and Aksoy, H. (2006), "Prediction of corporate financial distress in an emerging market: the case of Turkey", Cross Cultural Management: An International Journal, Vol. 13 No. 4, pp. 277-295. https://doi.org/10.1108/13527600610713396