Predicting Corporate Failure of Jordanian Companies Using Discriminant Analysis

Abstract

This research studies the corporate failure of Jordanian companies using Discriminant Analysis. The study contains detailed analysis and comparisons of two groups of failure and continues companies. The study examines the usefulness of the annual reports to predict the failure of the companies using Discriminant Analysis. Z-Score model is used to predict the corporate failure of companies in the industrial sector. The study consists of 16 companies of the industrial sector; 7 failed, 7 continued and another 2 companies that are hold-out sample to test the ability of the model to predict and classify the companies into fail or continue companies. All the financial data related to this research are taken from Amman Stock Exchange (ASE) and are limited to the industrial sector, during the period 1999-2014. The results show that Discriminant Analysis can predict corporate failure. The results also show that Gross Profit Ratio and the Working Capital are the most important ratios, which help in predicting the corporate failure of the industrial companies. The Discriminant Analysis model shows an accuracy of 73.2% in predicting corporate failure