The capability of both financial ratios and corporate governance to predict bankruptcy and to improve the accuracy of prediction in US sectors: univariate and multivariate models

Abstract

In light of the financial crises and uncertain events that lead to the rise of financial instability in general and bankruptcies in particular, the study aims to assess the ability of the two models, Univariate and Multivariate models, to predict bankruptcy and distinguish between US successful and failed companies that failed in 2016. The period from 2011 to 2015 was tested in this research, where this period was marked by the events of the decline in oil prices which had a negative impact on the economies of the US sectors that led to large number of bankruptcies in 2016. The study deals with three samples: the main sample contains 297 successful and failed companies from different sectors, the energy sector sample (95 companies) and the consumer discretionary sector (61 companies). In this study, 10 financial ratios, based on accounting data, as well as seven corporate governance variables are used to deduce the variables that statistically significant, and more importantly examine the effect from incorporation of both corporate governance variables and financial ratios on the predictive accuracy of model. The findings in this study are that the models have the ability of bankruptcy-prediction and discrimination between failed and non-failed firms. Moreover, the incorporation of both financial and governance variables resulted in an increase in the predictive accuracy of the model. However, some different significance results of variables between samples and years were found.