Failure Prediction: Evidence from Korea

Edward I. Altman, Young Ho Eom, Dong Won Kim

Research output: Contribution to journalArticle

26 Citations (Scopus)

Abstract

This study is an attempt to construct and test a distress classification model for Korean companies. Utilizing a sample of 34 distressed firms from the recent 1990‐1993 period and a matched (by industry and year) sample of non‐failed firms, we observe the classification accuracy of two models. Both models utilize measures of firm size, asset turnover, solvency and leverage with one model available for testing only on publicly traded companies and one model applicable to all public and private entities. We observe excellent classification accuracy based on data from the first two years prior to distress. And, although the accuracy drops off after t‐2, the models still provide effective early warnings of distress in many cases. The results of this study are of particular relevance in the current financial market scenario of increased deregulation and greater individual financial institution decision making. It is somewhat ironic for us to be proposing the use of a financial distress early‐warning model given the current robust economic growth and low bankruptcy rate in Korea. But, the financial problems in Japan are a sobering reminder that high growth can be followed by financial excesses, increased business failures and large loan losses.

Original languageEnglish
Pages (from-to)230-249
Number of pages20
JournalJournal of International Financial Management & Accounting
Volume6
Issue number3
DOIs
Publication statusPublished - 1995 Dec

All Science Journal Classification (ASJC) codes

  • Accounting
  • Business, Management and Accounting (miscellaneous)
  • Finance

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