A Model of Corporate Bankruptcy in Thailand Using Multiple Discriminant Analysis

This study argues that it is desirable to have a system that can reliably identify firms that are likely to become financially distressed. Such a warning system will enable parties with minor interests to adjust their investments before a firm's financial distress becomes apparent. It will also enable parties with major interests to enforce corrective actions which may prevent a firm from becoming bankrupt. In either case, potential losses can be reduced. Previous studies have used the statistical technique of multivariate discriminant analysis (MDA) for deriving models for predicting bankruptcies. This study applies the technique with the aid of financial ratios in Thailand for identifying the potential failure of listed companies. This study provides new evidence on whether MDA can be adopted as a tool for predicting the failure of Thai listed companies. The data used in this analysis was obtained from the Stock Exchange of Thailand (SET). The failed companies were delisted from the SET during the period 1997 to 2002. The financial variables are derived from Altman's (1968) five-ratio model and a range of published articles. The results of the univariate tests support the proposition that the financial ratios of failed firms differ significantly from non-failed firms. It is also found that the ratios of failed firms indicate lower profitability and liquidity. Leverage ratios also tend to be higher, while asset quality ratios are lower. The study uses MDA for identifying a firm's potential status up to five years in advance of failure. The optimal models contained the variables from Altman's (1968) five-ratio model, including retained earnings to total assets, EBIT to total assets, working capital to total assets, sales to total assets and market capitalisation to total liabilities. The results found that the mean rate of success during the testing phase for MDA was 59.6%. Overall, the results of this study expand the body of knowledge in the field of predicting bankruptcies in developing economies, by focusing on Thai firms. This study has shown that MDA can be useful for investors and regulators interested in identifying potential corporate failures. These models are likely to become more powerful and accurate over time as new additions and innovations are developed. Indeed, accounting ratios and models of bankruptcy can be of practical use for predicting the financial health of Thai corporations.