Forewarning Bankruptcy: An Indigenous Model for Pakistan

Abstract

Predicting financial health of enterprises is crucial for companies and banks (who lend money to them), as well as to all stakeholders. State Bank of Pakistan (SBP) has taken measures to implement Basel Accord framework for minimizing credit risk since its implementation in 2005. In this regard, there was a need for the development of corporate financial distress and bankruptcy prediction model which is specific to Pakistani companies to serve as a reliable tool for the assessment of financial health. In this paper we have proposed a model after a comprehensive analysis for objective prediction of financial health of companies. The proposed model has been tested for a sample of one hundred companies from non-financial sector of PSX listed companies, among which fifty were bankrupt and fifty financially healthy. Twenty-nine financial and accounting variables were used as input to model development procedure. The results suggest that the proposed model is capable of making a correct forecast of financial health of these companies.

Keywords: PSX, Financial Distress, Bankruptcy Prediction, Financial Ratios

JEL Classification: C53, M41, G33