Analysing corporate insolvency in the Gulf Cooperation Council using logistic regression and multidimensional scaling
Analysing corporate insolvency in the Gulf Cooperation Council using logistic regression and multidimensional scaling
In this paper, we examine corporate insolvency in the Gulf Cooperation Council (GCC) region between 2004 and 2011. Data comprises 28 financial ratio variables from 112 firms. We use Logit regression with best-subset selection criteria to investigate the predictive value of the ratios in the GCC context, particularly cash flow-based ratios. We also examine the main dimensions of the ratios, and the weights firms attach to them, using 3-way Multidimensional Scaling (MDS). We find that a parsimonious Logit model with the profitability ratio EBITTL, the leverage ratio TLTA and the cash flow ratios CFFOTA and CFFOCL can predict insolvency, ex-ante, with 84.8%, 95.6% and 73.9% overall, type I and II accuracy, respectively. From MDS, we uncover four financial-ratio dimensions: (i) ‘Non-strategic sales activities', (ii) 'Profitability and financial stability balance’, (iii) ‘Sales activities against capital conversion’; and (iv) ‘Market value against cash generation’. Insolvent firms appear very specific and attach most salience to the ‘Non-strategic sales activities’ dimension, unlike solvent firms which attach more salience to the other three dimensions. Therefore, the results imply that, to reduce susceptibility to insolvency, managers should focus less on non-strategic sales activities.
483-518
Khoja, Layla
fd10edc5-f537-41ac-a9f1-40ccb2e1b425
Chipulu, Maxwell
12545803-0d1f-4a37-b2d2-f0d21165205e
Jayasekera, Ranadeva
1788723e-6a7e-4302-9358-26acd64ea204
April 2016
Khoja, Layla
fd10edc5-f537-41ac-a9f1-40ccb2e1b425
Chipulu, Maxwell
12545803-0d1f-4a37-b2d2-f0d21165205e
Jayasekera, Ranadeva
1788723e-6a7e-4302-9358-26acd64ea204
Khoja, Layla, Chipulu, Maxwell and Jayasekera, Ranadeva
(2016)
Analysing corporate insolvency in the Gulf Cooperation Council using logistic regression and multidimensional scaling.
Review of Quantitative Finance and Accounting, 46 (3), .
(doi:10.1007/s11156-014-0476-y).
Abstract
In this paper, we examine corporate insolvency in the Gulf Cooperation Council (GCC) region between 2004 and 2011. Data comprises 28 financial ratio variables from 112 firms. We use Logit regression with best-subset selection criteria to investigate the predictive value of the ratios in the GCC context, particularly cash flow-based ratios. We also examine the main dimensions of the ratios, and the weights firms attach to them, using 3-way Multidimensional Scaling (MDS). We find that a parsimonious Logit model with the profitability ratio EBITTL, the leverage ratio TLTA and the cash flow ratios CFFOTA and CFFOCL can predict insolvency, ex-ante, with 84.8%, 95.6% and 73.9% overall, type I and II accuracy, respectively. From MDS, we uncover four financial-ratio dimensions: (i) ‘Non-strategic sales activities', (ii) 'Profitability and financial stability balance’, (iii) ‘Sales activities against capital conversion’; and (iv) ‘Market value against cash generation’. Insolvent firms appear very specific and attach most salience to the ‘Non-strategic sales activities’ dimension, unlike solvent firms which attach more salience to the other three dimensions. Therefore, the results imply that, to reduce susceptibility to insolvency, managers should focus less on non-strategic sales activities.
Text
Khoja et al 2014 Corporate_Insolvency Accepted Manuscript.pdf
- Accepted Manuscript
More information
Accepted/In Press date: August 2014
e-pub ahead of print date: 27 August 2014
Published date: April 2016
Organisations:
Centre of Excellence for International Banking, Finance & Accounting
Identifiers
Local EPrints ID: 368347
URI: http://eprints.soton.ac.uk/id/eprint/368347
ISSN: 0924-865X
PURE UUID: 6968ab8d-f8bd-4b50-a2d0-b55d66f9b9de
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Date deposited: 28 Aug 2014 10:30
Last modified: 15 Mar 2024 03:12
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Author:
Layla Khoja
Author:
Maxwell Chipulu
Author:
Ranadeva Jayasekera
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