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Predicting Corporate Failure of Malaysia Listed Company

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Predicting Corporate Failure of Malaysia Listed Company
International Research Journal of Finance and Economics ISSN 1450-2887 Issue 15 (2008) © EuroJournals Publishing, Inc. 2008 http://www.eurojournals.com/finance.htm

Predicting Corporate Failure of Malaysia’s Listed Companies: Comparing Multiple Discriminant Analysis, Logistic Regression and the Hazard Model
Nur Adiana Hiau Abdullah Universiti Utara Malaysia, Associate Professor Faculty of Finance and Banking, Universiti Utara Malaysia Sintok 06010, Kedah, MALAYSIA E-mail: diana897@uum.edu.my Tel: 00-604-9286464/006013 5306566; Fax: 00-604-9286406 Abd. Halim Universiti Utara Malaysia Hamilton Ahmad Universiti Utara Malaysia Rohani Md. Rus Universiti Utara Malaysia Abstract This study compares three methodologies for identifying financially distressed companies, multiple discriminant analysis (MDA), logistic regression and hazard model. In a sample of 52 distressed and non-distressed companies with a holdout sample of 20 companies, the predictions of the hazard model were accurate in 94.9 % of the cases examined. This was a higher accuracy rate than generated by the other two methodologies. However, when the holdout sample is included in the sample analyzed, MDA had the highest accuracy rate at 85%. Among the ten determinants of corporate performance examined, the ratio of debt to total assets was a significant predictor of corporate distress regardless of the methodology used. In addition, net income growth was another significant predictor in MDA, whereas the return on assets was an important predictor when the logistic regression and hazard model methodologies were used. Keywords: Bankruptcy, Multiple Discriminant Analysis, Logistic Regression, Hazard Model JEL Classification Codes: G33, C51

I. Introduction
The sudden currency crisis in 1997 has thrown many financially strong companies out of business. All because they were not able to face the challenges and the unexpected changes in the economy. The growing economy suddenly became an alien to them when


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