Document Type

Article

Publication Date

Winter 2007

Source Publication

Journal of Financial Education

Source ISSN

0093-3961

Abstract

One of the most well-known bankruptcy prediction models was developed by Altman [1968] using multivariate discriminant analysis. Since Altman's model, a multitude of bankruptcy prediction models have flooded the literature. The primary goal of this paper is to summarize and analyze existing research on bankruptcy prediction studies in order to facilitate more productive future research in this area. This paper traces the literature on bankruptcy prediction from the 1930's, when studies focused on the use of simple ratio analysis to predict future bankruptcy, to present. The authors discuss how bankruptcy prediction studies have evolved, highlighting the different methods, number and variety of factors, and specific uses of models.

Analysis of 165 bankruptcy prediction studies published from 1965 to present reveals trends in model development. For example, discriminant analysis was the primary method used to develop models in the 1960's and 1970's. Investigation of model type by decade shows that the primary method began to shift to logit analysis and neural networks in the 1980's and 1990's. The number of factors utilized in models is also analyzed by decade, showing that the average has varied over time but remains around 10 overall.

Analysis of accuracy of the models suggests that multivariate discriminant analysis and neural networks are the most promising methods for bankruptcy prediction models. The findings also suggest that higher model accuracy is not guaranteed with a greater number of factors. Some models with two factors are just as capable of accurate prediction as models with 21 factors.

Comments

Published version. Journal of Financial Education, Vol. 33 (Winter 2007): 1-42. Publisher Link. © Financial Education Association 2007. Used with permission.