International Journal of Accounting Research

Abstract

Financial Ratios, Econometrics and Prediction of Corporate Bankruptcy-an Empirical Study

Dhanesh Kumar Khatri

The discriminant function developed using discriminant analysis is Z = -3.4532 + 0.03605 Current ratio + 0.6589 Asset turnover +3.1129 Proprietary ratio. This helps in assigning ‘Z’ score to a company, which is capable of assigning a company either belonging to the group of solvent companies or to the group of bankrupt companies. By applying the discriminant model to the financial ratios of Lehman Brothers, Bear Sterns, and Freddie Mac we find that the application of this model would have helped in raising an alarm about the bankruptcy of these companies well in advance and acted as ‘Whistle Blower.’