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Volume :13 Issue : 2 2006      Add To Cart                                                                    Download

Using Financial Ratios in Predicting Failure of the Jordanian Public Companies Using Discriminant and Logistic Analysis

Auther : Mohamed Taysir A. Al- Rajabi

The study examines the importance of using the financial ratios to predict the failure of the public companies listed in Amman Stock Exchange. It uses a sample of 26 pairs of failing and non-failing companies from the 1991 to 2002 period with 25 financial ratios and two statistical techniques which are: linear discriminant analysis and logistic regression. The financial ratios cover solvency, profitability, leverage and activity. The results indicate that the classification accuracy of discriminant analysis and logistic regression is 96.2%. This implies that the statistical models can be used to predict failure in Jordan as well as in foreign countries but with using different financial ratios. Using Jacknife technique to test for the external validation of the results indicates that these models are reasonably accurate. However, the accuracy of these models decreases when they are used to predict corporate failure during the second to the fifth year before failure.

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