Bankruptcy Prediction for Financial Sector of Pakistan: Evaluation of Logit and Discriminant Analysis Approaches

Usama Ehsan Khan


DOI: http://dx.doi.org/10.22555/pjets.v6i2.1966

Abstract


Bankruptcy prediction is one of the core area in finance that is quite rich in empirical and theoretical work. This study compares two models for measuring the financial position of financial firms listed in Karachi Stock Exchange. The study gives a comprehensive review of two models, namely Altman’s [1] Z-score and an O-Score derived from Ohlson [14]. The purpose of this paper is two folded. First to identify unique characteristics of business failure and to compare effective variables responsible for this response. Secondly to compare two popular accounting-based measures. summarize publiclyavailable information about bankruptcy. The sample period for this study is from 2009 to 2015. From the KSE listed financial firms, a total of 40 firms were selected and accounting ratios were extracted from balance sheet analysis reports published by State bank of Pakistan. The empirical results concluded that the logit model has a high rate of classification as compared to multiple discriminant analysis. The model has obtained overall 85.5% accuracy and identified three significant accounting ratios that are: retained earnings to total asset, earnings before income and taxes to the total asset, and current liabilities to total asset. The finding of this study would benefit stakeholders that are affected by bankruptcies. So in order to take an advantage, it is important to understand the phenomenon that causes bankruptcies.


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References


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Chief Editor

Prof. Dr. Ejaz Ahmed 
Dean
College of Computer Science & Information Systems

Editor

Prof Dr. S. M. Aqil Burney

Associate Editors

Prof. Dr. Tariq Rahim Soomro
Dr. Muhammad Mansoor Aalam

Publication Coordinator
Konpal Darakshan

Editorial Advisory Board (Internal)

Dr. Syed Irfan Hyder
Dr. Mohammad Irshad Khan
Dr. Shahid Amjad
Dr. Abdul Rauf Farooqui
Dr. Syed Iftikhar Ali
Dr. Tajuddin Islamuddin
Dr. Muhammad Danish Khan
Dr. Imran Majid
Dr. Fatima Riaz
Dr. Adeel Ansari
Dr. Zeeshan Shahid
Ms. Seema Ansari

Editorial Advisory Board (International)

Prof. Dr. Mazliham Mohd Su'ud, President, Universiti Kuala Lumpur, Malaysia
Prof. Dr. Ghassan Al-Qaimari, President, Emirates College of Technology, Abu Dhabi, UAE
Prof. Dr. Patrice Boursier, Universite de La Rochelle, La Rochelle, France
Prof. Dr. Mudassir Uddin, Professor, University of Karachi, Pakistan
Dr. Nadeem Doudpota, Associate Professor, Al-Baha University, KSA
Dr. Haithem Abdelrazaq Almefleh, Associate Professor, Yarmouk University, Yarmouk, Jordan
Dr. S. Asim Ali, Assistant Professor, University of Karachi, Pakistan

Member Editorial Review Board (International – Academia)

Dr. Asadaullah Shah, Professor, International Islamic University, MalaysiaDr. Hasan Wahba, President American College of Dubai, United Arab Emirates (UAE)
Dr. Tahseen Jilani, Assistant Professor, University of Manchester, UKDr. Atif Memon, Associate Professor, The University of Maryland, USA
Dr. Syed Waliullah Shah, University Sains, MalaysiaDr. Inayatullah Shah, International Islamic University, (Kuantam), Malaysia
Dr. Salahttin Kuru, Kemeburgaz University, TurkeyDr. Soon Min, INTI International University, Malaysia
Dr. Shahrulniza Musa, Professor, Malaysian France Institute, Universiti Kuala Lumpur, Bandar Baru Bangi, MalaysiaDr. R. Praveen Sam, Professor, Department of Computer Science and Engineering, G. Pulla Reddy Engineering College, KURNOOL, India
Dr. Manzoor Ahmed Hashmani, Associate Professor, University Technology Petronas, MalaysiaDr. Alveera Mehdi, Professor, Aligarh Muslim University, Aligarh, India

Dr. Sajjad Waheed, Professor, Department of Information and Communication Technology, Mawlana Bhashani Science and Technology University, Tangail 1902, Bangladesh

Dr. Kushairy Bin Abdul Kadir, Associate Professor, British Malaysian Institute, Universiti Kuala Lumpur, Gombak, Malaysia
Dr. Mohammad Hameed Ahmed AlTaei, Assistant Professor, Applied Sciences College, Sohar, OmanDr. Eiad Yafi, Associate Professor, Malaysian Institute of Information Technology Universiti, Malaysia
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Dr. Aymen Adil Belghith, Assistant Professor, University of Sfax, Sfax,TunisiaDr. Radwan Alsadiq Alqirmazi, Assistant Professor, University of Sfax, Sfax,Tunisia
Dr. Mohammad Arif Amin, Assistant Professor, Higher College of Technology, Abu Dhabi Men’s College, Abu Dhabi, United Arab Emirates (UAE)Dr. Ismat Aldmour, Assistant Professor, Al-Baha University, Kingdom of Saudi Arabia (KSA)
Dr. AbdulRahman Ahmed Mohammed Al-Sewari, Senior Lecturer, Universiti Malaysia Pahang, Pahang, MalaysiaDr. Mohammed A. Afifi, Director, Associate of Science in Computer Science, Al Dar University College, Dubai, United Arab Emirates (UAE)
Dr. Youssef Ahmed Masmoudi, Assistant Professor, Saudi Electronic University, Jeddah male Campus, Kingdom of Saudi Arabia (KSA)Dr. Zulfiqar Memon, Assistant Professor, Ajman University of Science & Technology, Ajman, United Arab Emirates (UAE)
Dr. Abdul Basit Samsuddin Banga, Assistant Professor, Saudi Electronic University, Jeddah male Campus, Kingdom of S. Arabia (KSA)Dr. Mohamad Ismail Sulaiman, Senior Lecturer, British Malaysian Institute, Universiti Kuala Lumpur, Gombak, Malaysia
Dr. Syed Faiz Ahmed, Senior Lecturer, British Malaysian Institute, Universiti Kuala Lumpur, Gombak, Malaysia

Dr. Jawad Ali Shah, Senior Lecturer, British Malaysian Institute, Universiti Kuala Lumpur, Gombak, Malaysia

Dr. Sarfraz Nawaz Brohi, Lecturer, Taylor’s Unversity, Lakeside Campus, Malaysia

Dr. Fahad Sikander, Assistant Professor, Saudi Electronic University, Kingdom of Saudi Arabia (KSA)


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Dr. Abdul Razaque Memon, Director Solution Marketing at Huawei Technology, AustraliaDr. Syed Abbas, Project Director, NetSys Technical Services, Business Bay, Duabi, United Arab Emirates (UAE)
Dr. Muntasser Khater, Educational Senior Consultant, CAN DU e-Business, Dubai, United Arab Emirates (UAE) 

Member Editorial Review Board (National – Academia)

Dr. Madad Ali Shah, Professor and Vice Chancellor, BBS University of Technology & Skill Development, KhairpurDr. B. S. Chaudhry, Professor, Mehran University of Engineering & Technology (MUET), Jamshoro
Dr. Mir Ghulam Hyder Talpur, Professor, University of Sindh, JamshoroDr. Imdad Ismaili, Professor, University of Sindh, Jamshoro
Dr. Syed Asif Ali, Professor, Sindh Maderessah Tul Islam University, KarachiDr. Mukhtiar Ali Unar, Professor, Mehran University of Engineering & Technology (MUET), Jamshoro
Dr. Syed Amir Iqbal, Associate Professor, NED University, KarachiDr. Syed Haider Shah, Associate Professor, Univeristy of Balochistan, Quetta
Dr. Talal Shrafat Rehmani, NUST, KarachiLt. Cdr. Dr. Asif Mansoor, NUST, Karachi
Dr. Faisal Maqbool Zahid, Associate Professor, University of Faisalabad 

Member Editorial Review Board (National – Non Academia)

Dr. Amir Khan, Ministry of Defense, Govt. of Pakistan, KarachiDr. Bahrawar Jan, Pakistan Bureau of Statistics, Islamabad