A statistical approach to predicting business failure in Turkey

Abstract

This study analyzes seventeen financial ratios of 29 failed and 29 notfailedcompanies for a period of four years to determine the combination ofratios that would predict a future failure. Since records for failed firms werenot accessible the criteria of failing was set by the analysis~ The period ofanalysis was chosen to be at least three years before the actual failure and inmost cases strong indicators of failure occurred only after the analysisperiod.A two stage factor analysis resulted in four factors that became theinputs of a discriminant analysis. The discriminant function was expected tosummarize the information in a set of ratios to a discriminant score thatdifferentiates successful and unsuccessful firms best.A statistically significant discriminant function with a satisfactory hitratio was obtained at the end of the analysis. The results were parallel to theones that were derived by other analysts who used a completely different setof data coming from a completely different environment.