Financial predictors of corporate insolvency - assessment of the forecast horizon of variables in models of early warning against corporate bankruptcy
Financial predictors of corporate insolvency - assessment of the forecast horizon of variables in models of early warning against corporate bankruptcy

Summary/Abstract: The authors of the study put forward a hypothesis that it is possible to extend the forecast period for the models of discriminant analysis used to assess the risk of enterprise bankruptcy, focusing on the components of these functions in the form of one-dimensional predictors, i.e. the indicators most frequently included in the discriminant functions developed in Poland. Early warning about the growing risk of bankruptcy would be very valuable for any company. The dataset was constructed from all enterprises in Poland that went bankrupt in the years 2007-2013, which was the end of the research project period. Out of the 4,750 business entities that went bankrupt at that time, 2,739 filed financial statements with commercial courts. The main objective was realized using dynamic assessment of the variability of selected one-dimensional predictors of bankruptcy for all of these enterprises. Assessment of the time variability of the indicators under analysis allows conclusions on the predictive possibilities associated with early warning against insolvency of business entities. The results constitute input to the discussion on determination of the longest prognostic horizon that can be adopted in the models of discriminant analysis used to assess the risk of enterprise bankruptcy. Most of them cover an annual forecasting horizon. Only a few authors have attempted to construct models based on data from the two, three, or even four years preceding bankruptcy. The study showed that the main symptoms of the growing risk of bankruptcy in most of the surveyed enterprises are visible much earlier than one year before bankruptcy. This provides an opportunity to correct the predictive models and more time to restructure the company, to prevent bankruptcy. Therefore, the authors of the study have assessed the possibility of extending this forecast period.

• Details
• Contents