Different bankruptcy prediction patterns in an emerging economy: Iranian evidence

Abstract

Purpose

Bankruptcy, stock price fluctuations and making decisions to invest on the listed companies on the Tehran Stock Exchange show the need to have some tools for evaluating the financial potential of companies. One of the tools for evaluating financial power to investment in companies is using analysis of financial ratios and obtaining the patterns for predicting the bankruptcy of companies. The purpose of this study is to modify the current patterns for predicting bankruptcy in proportion to the environmental status of Iran and to present a new pattern for determining the bankruptcy of the listed companies.

Design/methodology/approach

To modify the patterns and present a new pattern, in this research, the hypotheses pertinent to the ability for right classification of the companies are designed by the modified patterns of predicting the company’s bankruptcy and ranking, that is according to the envelopment analysis method and by comparison of the results and presenting a new prediction pattern.

Findings

The hypotheses test results show that modification of bankruptcy patterns and presentation of a new bankruptcy pattern are confirmed by the data envelopment analysis.

Originality/value

The current paper is almost the first paper which combined several different methods of bankruptcy prediction.

Citation

Salehi, M. and Mousavi Shiri, M. (2016), "Different bankruptcy prediction patterns in an emerging economy: Iranian evidence", International Journal of Law and Management, Vol. 58 No. 3, pp. 258-280. https://doi.org/10.1108/IJLMA-05-2015-0022