Study on the Prediction of Corporate Bankruptcy

Study on the Prediction of Corporate Bankruptcy CHAPTER 1: A number of researches have been carried on the prediction of bankruptcy; formal studies linked with failure of business were conducted in 1930s. A study conducted by Simth and Winakor (1935) said that ratios of the failing firms were significantly changed from the continuing firms. In addition to that another study was related to the financial ratio of large size corporation that suffered in meeting fixed liability (Hickman 1958). Recent studies took potential ratios given in annual financial statements like profitability, solvency, and liquidity ratios considered as the most predictive indicator and these ratios were matched with failed and well worth firms for analysis. A group of financial and economic ratios were examined in the prediction of bankruptcy through multiple discriminant statistical technique, highest contributor ratios were profitability, operational profit/ total assets and very low contributor ratio was working capital/Assets (Altman, 1968). According to Pastena and Ruland (1968), the bankruptcy was defined in the literature review in various ways. Among those one was in a condition of negative worth where the market value of assets was less than the total value of liabilities. And the other was that the firm was not in a condition to pay back its liabilities as it became due. This term could also be used in a legal condition under which the firms continued to operate under court protection. 1.2 Problem Statement In the corporate finance, the prediction of corporate bankruptcy was considered to be one of the most important issues. The main objective behind the study of the prediction of corporate bankruptcy was that this was the most important issue for the present firms to either file for the bankruptcy or not. The rationale of the study was to examine whether the financial ratios given in detail by Altman (1968) presented the detail regarding the factors of the firm which were helpful in the prediction of corporate bankruptcy in Pakistan. The capacity of study was to investigate the distinctive financial ratios which impacted the firms decisions to file for the bankruptcy or not and on the basis of firms financial ratios, the research study found the different significant ratios which were useful in determining the prediction of any of the organization. 1.3 Hypotheses The main problem of the different firms was to identify those financial factors or the most important ratios which could lead to the filing of bankruptcy or those factors which were useful in determining the prediction of the corporate firms. A central query in front of firms which wanted to file for bankruptcy was why the firms filed for bankruptcy or what financial factors helped out in taking decision to file for bankruptcy. Various financial factors or ratios impacted the decision regarding the filing for bankruptcy. These financial characteristics or the most important ratios were current ratio, debt ratio, net profit margin, assets to long term debt ratio, and growth rate. Many authors as Altman (1968) discussed these characteristics in research. The hypothesized relationship of these listed financial factors with bankruptcy was provided below: H1: There is a difference between the Current ratio of bankrupted companies and non bankrupted companies. H2: There is a difference between the Debt ratio of bankrupted companies and non bankrupted companies. H3: There is a difference between the Net Profit Margin ratio of bankrupted companies and non bankrupted companies. H4: There is a difference between the Assets to long term debt ratio of bankrupted companies and non bankrupted companies. H5: There is a difference between the Growth rate of bankrupted companies and non bankrupted companies. 1.4 Outline of the Study The research structured as follows. Chapter one based on the introduction of the thesis, which consists of the some introduction of the prediction of bankruptcy by different authors, the statement of problem, scope and objectives, hypothesis etc. Chapter two consists of literature review given by different authors, theories on prediction of bankruptcy and financial factors affecting the choice of decision to file for bankruptcy or not. Chapter three described methodology which is composed of justification of the selection of the variables utilized in analysis sample, the data, technique and hypothesis, also estimate model utilized in analysis. In chapter four, analyses of the results were there which were taken after the data processing. Chapter five contained the final results, conclusions and recommendations. References are included in chapter number six. CHAPTER 2: LITERATURE REVIEW A number of researches have been carried on the prediction of bankruptcy; formal studies linked with failure of business were conducted in 1930s. A study conducted by Simth and winakor (1935) said that ratios of the failing firms were significantly change from the continuing firms. In addition to that an other study was related to the financial ratio of large size corporation that suffered in meeting fixed liability (Hickman 1958). Recent studies took potential ratios given in annual financial statements like profitability, solvency, and liquidity ratios considered as the most predictive indicator and these ratios were matched with failed and well worth firms for analysis. A group of financial and economic ratios were examined in the prediction of bankruptcy through multiple discriminant statistical technique, highest contributor ratios were profitability, operational profit/ total assets and very low contributor ratio was working capital/Assets (Altman, 1968). A study conducted by Sandin and Porporato (2007) on corporate bankruptcy prediction model applied to emerging economies. The aim of this study was to find the predictability of bankruptcy by using the financial ratios given in the financial statements and these financial statements were taken from the Buenos Aires Stock Exchange. To test the hypothesis twenty two bankrupt and non bankrupt companies were examined by using the multiple discriminant analysis technique, resulted that financial ratios were very useful in predicting the bankruptcy. Actually this study was about the prediction model and classification of the distressed and failed companies in the Argentina. William Beaver (1996) conducted a study that Financial Ratios As Predictor of Failure, wherein ratios were tested for a specific purpose. The purpose was to forecast the failure. Since ratios were mostly examined for the prediction of failure. The aim of the study was to analyze the status quo that was depended on the financial statements made under the reporting standard and this study was conducted as a bench mark for further studies in bankruptcy area. Sample of data was selected on the basis of industry, firm size and period, Walworth companies should have taken from the same industry where from failed companies taken along with same firm size based on firm value and equal time duration then reliable result can be obtained said by Beaver (1996). This study pointed out and directed to the asset size and relationship among ratios, assets size and failure, study implicated that larger firms were more solvent than smaller firms, even if ratios were same. To examine the hypothesis, a paired analysis was used. According to Pastena and Ruland (1968), the bankruptcy was defined in the literature review in various ways. Among those one was in a condition of negative worth where the market value of assets was less than the total value of liabilities. And the other was that the firm was not in a condition to pay back its liabilities as it became due. This term could also be used in a legal condition under which the firms continued to operate under court protection. Merger and Bankruptcy Based on the literature review in the different research studies, it was found that the shareholders of the distressed firms were getting more benefit from mergers than from the bankruptcy. Thus, the investors kept the positive number of the firms stocks up as a consequence of the merger. Contrastingly, the stakeholders received nothing in case of the bankruptcy. Shrieves and Stevens (1979) managed to explain all of the possible reasons for preferring merger over bankruptcy and those principles included: (1) to avoid the bankruptcy legal and administrative costs, (2) possible loss of tax carry forwards of the loss firm incurred on liquidation, (3) the value of the going-concern in the merger was more than liquidation value if the firm bankruptcy progressed towards the liquidation, and (4) the bankruptcy created the bad effects on the revenues including sales and income due to the customer fears of inability contracts, give replacement parts, etc. Bulow and Shoven (1978) noticed based on the research that the investors have always been avoiding the bankruptcy and this tendency always benefitted the creditors as a whole and that theoretically, the bankruptcy occurred because of the disagreement between the concerned parties. This was treated in a literature that the merger was the best possible alternate of the bankruptcy with the assumption in the mind that it was more easy for the distressed firms to find a merger partner at some price as long as the net asset value was positive and this was also under the assumption of a well-functioning market for information. When the situation was aggravated toward a condition of less or negative net asset value, the possibility of merger was reduced. Hong (1983) made an empirical as well as theoretical model which distinguished among three different categories of financially upset firms and it was organized in three ways such as: firms which filed bankruptcy but reorganized successfully, firms which filed for bankruptcy but were liquidated ultimately, and also the firms which continued operations with out even filing for bankruptcy. Author further made a hypothesis that the intangible assets, the value of the firm as in a going concern and the value of the same firm in liquidation was different, were the main describing factor which affected the eventual outcome. The firms which had greater intangible assets were possibly having a sustainable economic growth and that growth allowed a firm to survive rather than be liquidated. LoPucki (1983) made an explanatory study of about 41 firms which filed the bankruptcy court of the Western District of Missouri. In this study, the à ¢Ã¢â€š ¬Ã…“successesà ¢Ã¢â€š ¬? were defined as the firms which have verified its various reorganization strategies that kept it on to survive for about three years after the date of petitioning the bankruptcy. Failures according to the author were those firms which had stopped operating functions before February 1983. LoPucki (1983) further could not try to make a method with discriminatory power, but in fact simply scrutinized the associations between the results of reorganization process and numerous individual variables. These individual variables included size, age, and type of the businesses, the survival of creditors opposition to the reorganization strategy, and physical geographic location. The relationships which were found during the research were: significantly higher success rate was associated with the manufacturing fi rms; more successful firms were only the larger firms; success was not significantly associated with the age of the firms; the target opposition of the creditors was mainly at the more successful firms; and lastly, the physical geographical location was not a significant describing variable. In short, only a finite amount of research was conducted on the topic of differentiating between failures and successes in bankruptcy, and outcomes have been open to doubts or inconclusive. The one published study conducted by the LoPucki (1983), scrutinized the first order correlations and could not struggle to build the model of classification. The other published research study conducted by Hong (1983), scrutinized the comparative importance of numerous individual variables and had not analyzed the classification authentication of the multivariate model. As it was already discussed in detail, this present study scrutinized the classification authentication of the multivariate model by using data from both analysis sample and a holdout sample 113 firms. Bordman, Bartley, and Ratliff (1981) noticed that firms went bankrupt only when its capital resources were not enough to pay back the obligations of the business. Thus it became the more important challenge for the new comers in the industry to maintain and establish such valuable resources and capabilities which could ultimately leaded to the production of positive cash flows before starting asset resources were exhausted (Levinthal, 1991). According to DAveni (1989), and Hambrick and DAveni (1988), both researches have noticed that most of the attention has been paid to the early failures and dramatic research has also been conducted in the literature. A macro view of the bankruptcy was given as a known strategy and an empirical examination of factors associated to successful reorganization (Moultan, and Thomas, 1993) and however, the structures of corporate governance were not incorporated in the analysis. An extensive data was available relating the intensity to which the officers and directors of the firm which was bankrupt were more possibly resigning or were being replaced (DAveni, 1990; Fizel Louie, 1990; Gilson, 1989). Several researchers used the multiple discriminant analysis MDA technique to develop a linear model to predict those firms which failed could be differentiated from the non-failed firms in UK (Taffler, 1977). This model resulted in an overall classification authentication for the year before the failure as comparative to three or two prior years of failure. The major contribution made by Taffler was the establishment of a Z-score model which was used for the prediction of company failures in the UK and furthermore, the author claimed of 100 percent predictive authentication in the model. In addition, in the consequent studies, Taffler (1982, 1983) discussed the pairing technique which was used in the prediction of corporate failure studies proved no more successful technique than any selection by the other tool or technique. Multiple Discriminant Analysis MDA models were dependable to certain intensity in the prediction of corporate failure. CHAPTER 3: RESEARCH METHODS 3.1 Method of Data Collection Data was selected from Karachi Stock Exchange KSE 100 Index as given by State Bank of Pakistan in publication Balance Sheet Analysis of Joint Stock Companies Listed on the KSE (2004-2009). The period of study covers six years, 2004-09. The opted sample size of 44 firms was taken from KSE 100 Index and all of the firms listed on KSE 100 Index were selected for the samples which were going to bankruptcy in the past and some were also the present functioning firms which were currently working; so, only 44 firms included in the sample period of 2004-09. The objective behind the inclusion of these selected firms in the sample was that the inclusion of bankrupt and non-bankrupt firms in the analysis made it easier to distinguish the critical financial ratios of these both firms in order to predict for corporate bankruptcy. The data availability was the major issue faced in this research study. The secondary data sources were adopted for the collection of the data during this research study. Both of the empirical and theoretical aspects regarding the prediction of corporate bankruptcy were analyzed in this research study. For the purpose of the collection of the secondary data, external data sources were used, such as the data was collected from State Bank of Pakistan, general business publications, newspapers and journal articles, annual reports, internet and books. The data required for this study was completely dependent on the published data sources, such as the published sources listed above. 3.2 Sample Size A sample of 44 firms from KSE 100 Index was selected and in addition, out of these firms 22 firms were bankrupt and the remaining 22 were not bankrupt which was taken as the holdout sample for the prediction of the corporate bankruptcy. Only firms were used in the samples which were either became bankrupt due to the impact of the some of the financial factors or the ratios or the firms which were in operations during the research study was conducted and these firms were listed on the KSE 100 Index form 2004-2009. The impact of the different financial factors or ratios, which were listed in the previous chapters, on the prediction of corporate bankruptcy was analyzed on all of the firms selected as the sample. 3.3 Research Model Developed There are various financial factors or the ratios of the firms which affected the prediction of the corporate bankruptcy of the firms. This research study analyzed the impact of different factors or ratios already listed in the previous chapters on the prediction of corporate bankruptcy. The model developed was a binary logistic model and its specifications are provided below: Liquidity = a0 + a1Firm Size + a2DEBT + a3LTD + a4LSALES + a5OI/S + a6OI/TA+ a7IGP/TA+ a8Market to Book Ratio + ц where: Liquidity = the sum of cash and marketable securities divided by total assets Firm Size = natural log of the book value of total assets DEBT = the ratio of shorter period plus longer period debt to total assets LTD = the ratio of longer period debt to total assets LSALES = natural log of the annual sales OI/S = the ratio of operating income to sales OI/TA = the ratio of operating income to total sales IGP/TA = the inventory plus gross fixed assets to total assets ratio à Ã¢â‚¬Å¾ = the error term 3.4 Statistical Technique Binary Logistic Regression Analysis technique was used for this research study to examine the impact of the distinctive financial characteristics or the financial ratios of the firms on the prediction of corporate bankruptcy of the selected firms; Statistical Package for the Social Sciences (SPSS) was used for the examination of the secondary data. Binary Logistic Regression Analysis technique was used for the purpose of prediction of of corporate bankruptcy or the prediction of the firms decisions to file for bankruptcy. The selected technique was used to study the impact of the different independent variables (financial factors as listed in the previous chapters) on the dependent variable i.e., prediction of corporate bankruptcy. The binary logistic regression analysis was selected for this study. It showed the intensity of the impact on the prediction of corporate bankruptcy during year 2004-2009 on the basis of several independent variables. CHAPTER 4: RESULTS The sample of 44 firms from the Karachi Stock Exchange KSE 100 Index was taken; Binary Logistic Regression Analysis technique was used for this research study. Research examined the distinctive financial characteristics or financial ratios of firms which filed for the bankruptcy. The selected technique was used to study the impact of the different independent variables (financial factors as listed in the previous chapters) on the dependent variable i.e., the prediction of corporate bankruptcy. Statistical Package for the Social Sciences (SPSS) was used for the analysis and examination of data. 4.1 Findings and Interpretation of the results Initially, the binary logistic regression technique was applied on the data collected using SPSS. Now, it was a nice time to proceed with the analysis of the results because the data was collected and ready to be examined. The interpretation and analysis is presented in the next sections of this research study. Case Processing Summary Unweighted Casesa N Percent Selected Cases Included in Analysis 192 91.4 Missing Cases 18 8.6 Total 210 100.0 Unselected Cases 0 .0 Total 210 100.0 This table explains the total population in the data file that is the 210 observations or the cases for the analysis of the bankruptcy prediction. This table further elaborates that the there were also some of the cases missing in the data because of the issue of data availability and some of the cases were the figures of zero. Dependent Variable Encoding Original Value Internal Value Bankrupt 0 Non-Bankrupt 1 The above table shows that there are only two variables in the dependent variable of bankruptcy that are the being bankrupt or non-bankrupt. Model Summary Step -2 Log likelihood Cox Snell R Square Nagelkerke R Square 1 234.707a .144 .192 This table elaborates the predictability of the complete model of the logistic regression which meant that to what extent the model predict the variation in the predicted group of bankruptcy. According to Cox Snell, the total predictors jointly explained variation in the groups of bankruptcy was 14.4%. While according to Nagelkirki, the all independent variable explained the group prediction of about 19.2%. Hosmer and Lemeshow Test Step Chi-square df Sig. 1 32.715 8 .000 This table checks the overall model fit which means that the model is at its best in predicting the group variation from non-bankrupt to bankrupt. The hypothesis of the above table is that the test model is fit. The hypothesis is rejected because the sig value is less than .05 which concluded that the test model was not fit in this case of predicting the group variation. Classification Tablea Observed Predicted Banckruptcy Percentage Correct Bankrupt Non-Bankrupt Step 1 Banckruptcy Bankrupt 76 29 72.4 Non-Bankrupt 43 44 50.6 Overall Percentage 62.5 The classification table is the most important table in case of the logistic regression because this table explained the correct identification of the cases correctly identified. The percentage of correctly identified cases is 62.5% which is also commonly known as the hit ratio which means that to what extent the numbers of cases were correctly identified. Variables in the Equation B S.E. Wald df Sig. Exp(B) 95% C.I.for EXP(B) Lower Upper Step 1a DA -1.219 .510 5.725 1 .017 .295 .109 .802 AtoLTD -.002 .001 1.583 1 .208 .998 .996 1.001 CR .938 .348 7.242 1 .007 2.554 1.290 5.056 NPM .037 .073 .262 1 .609 1.038 .899 1.198 SG .161 .232 .482 1 .488 1.175 .745 1.852 Constant .066 .579 .013 1 .910 1.068 This is the final most important table in the logistic regression because this is the only table which shows the role of different predictors in significantly explaining the role in the prediction of group variations. Those important significant variables were only two that were DA, and CR because the sig value of only these variables were less than .05. 4.2 Hypotheses Assessment Summary The hypothesis of the study was distinctive financial ratios have significant impact on the non firms decision to file for bankruptcy. These financial characteristics were current ratio (CR), debt ratio (DA), net profit margin (NPM), assets to long term debt ratio, and growth rate. In this study each of the financial characteristics or financial ratios of firms was tested and concluded the results. TABLE 4.4 : Hypotheses Assessment Summary S.NO. Hypotheses ÃŽÂ ²       SIG. RESULT H1 There is a difference between the Current ratio of bankrupted companies and non bankrupted companies. 0.938 0.007 Accepted H2 There is a difference between the Debt Ratio of bankrupted companies and non bankrupted companies. -1.219 0.017 Accepted H3 There is a difference between the Net Profit Margin Ratio of bankrupted companies and non bankrupted companies. 0.037 0.609 Rejected H4 There is a difference between the Assets to long term debt ratio of bankrupted companies and non bankrupted companies. -0.002 0.208 Rejected H5 There is a difference between the Growth rate of bankrupted companies and non bankrupted companies. 0.161 0.488 Rejected CHAPTER 5: DISCUSSIONS, CONCLUSION, IMPLICATIONS AND FUTURE RESEARCH 5.1 Conclusion It was concluded based on the results of this research study that current ratio and debt ratio were only the independent variables which were showing significance in Pakistani market and these variables were highly significant in playing the vital role explaining the variation in the dependent variable of the prediction of corporate bankruptcy and the remaining independent variables could not explain the variation in the prediction of corporate bankruptcy. These results were not matching with the study conducted by Altman (1968). These results were varying because in various countries, there was difference in environments and circumstances and firms usually made decision accordingly. 5.2 Discussions Current ratio played a significant role in defining the variation in the prediction of corporate bankruptcy and this was also the case with the research study conducted by Altman (1968) because in his study the firm size was also playing a significant role. The variation in the prediction of corporate bankruptcy was not explained by the net profit margin ratio while it was significant in the study done by Altman (1968). The assets to long term debt ratio, and growth rate were not significantly explaining the variation in the prediction of corporate bankruptcy and study analyzed by Altman (1968), concluded the different results with some addition. 5.3 Implications and Recommendations This research was limited to the various firms listed on Karachi Stock Exchange of Pakistan only. The data taken from 44 firms which were took through various sectors of the KSE 100 Index for the year 2004-09 which were previously bankrupt and which were currently operating. It suggested that such type of study should be carried out in other countries of Asia as well, as to have comprehensive idea about the choices of the firms decision to file for bankruptcy. Moreover, it also suggested that other factors except ones examined in this study should be researched as to have perfect idea about the selection of the prediction of corporate bankruptcy. Besides that, this study can also be replicated in other developing countries. 5.4 Future Research This study helped various investors, management and other research conductors in analyzing and observing the behavior of firms regarding their decisions to file for the bankruptcy. Research students who want to work further on the prediction of bankruptcy can be benefited by this research study. Further more, the firms will become advantageous from this study because the study clarifies the distinctive financial characteristics or the financial ratios of different firms which significantly explain the variations in the prediction of corporate bankruptcy. Study on the Prediction of Corporate Bankruptcy Study on the Prediction of Corporate Bankruptcy CHAPTER 1: A number of researches have been carried on the prediction of bankruptcy; formal studies linked with failure of business were conducted in 1930s. A study conducted by Simth and Winakor (1935) said that ratios of the failing firms were significantly changed from the continuing firms. In addition to that another study was related to the financial ratio of large size corporation that suffered in meeting fixed liability (Hickman 1958). Recent studies took potential ratios given in annual financial statements like profitability, solvency, and liquidity ratios considered as the most predictive indicator and these ratios were matched with failed and well worth firms for analysis. A group of financial and economic ratios were examined in the prediction of bankruptcy through multiple discriminant statistical technique, highest contributor ratios were profitability, operational profit/ total assets and very low contributor ratio was working capital/Assets (Altman, 1968). According to Pastena and Ruland (1968), the bankruptcy was defined in the literature review in various ways. Among those one was in a condition of negative worth where the market value of assets was less than the total value of liabilities. And the other was that the firm was not in a condition to pay back its liabilities as it became due. This term could also be used in a legal condition under which the firms continued to operate under court protection. 1.2 Problem Statement In the corporate finance, the prediction of corporate bankruptcy was considered to be one of the most important issues. The main objective behind the study of the prediction of corporate bankruptcy was that this was the most important issue for the present firms to either file for the bankruptcy or not. The rationale of the study was to examine whether the financial ratios given in detail by Altman (1968) presented the detail regarding the factors of the firm which were helpful in the prediction of corporate bankruptcy in Pakistan. The capacity of study was to investigate the distinctive financial ratios which impacted the firms decisions to file for the bankruptcy or not and on the basis of firms financial ratios, the research study found the different significant ratios which were useful in determining the prediction of any of the organization. 1.3 Hypotheses The main problem of the different firms was to identify those financial factors or the most important ratios which could lead to the filing of bankruptcy or those factors which were useful in determining the prediction of the corporate firms. A central query in front of firms which wanted to file for bankruptcy was why the firms filed for bankruptcy or what financial factors helped out in taking decision to file for bankruptcy. Various financial factors or ratios impacted the decision regarding the filing for bankruptcy. These financial characteristics or the most important ratios were current ratio, debt ratio, net profit margin, assets to long term debt ratio, and growth rate. Many authors as Altman (1968) discussed these characteristics in research. The hypothesized relationship of these listed financial factors with bankruptcy was provided below: H1: There is a difference between the Current ratio of bankrupted companies and non bankrupted companies. H2: There is a difference between the Debt ratio of bankrupted companies and non bankrupted companies. H3: There is a difference between the Net Profit Margin ratio of bankrupted companies and non bankrupted companies. H4: There is a difference between the Assets to long term debt ratio of bankrupted companies and non bankrupted companies. H5: There is a difference between the Growth rate of bankrupted companies and non bankrupted companies. 1.4 Outline of the Study The research structured as follows. Chapter one based on the introduction of the thesis, which consists of the some introduction of the prediction of bankruptcy by different authors, the statement of problem, scope and objectives, hypothesis etc. Chapter two consists of literature review given by different authors, theories on prediction of bankruptcy and financial factors affecting the choice of decision to file for bankruptcy or not. Chapter three described methodology which is composed of justification of the selection of the variables utilized in analysis sample, the data, technique and hypothesis, also estimate model utilized in analysis. In chapter four, analyses of the results were there which were taken after the data processing. Chapter five contained the final results, conclusions and recommendations. References are included in chapter number six. CHAPTER 2: LITERATURE REVIEW A number of researches have been carried on the prediction of bankruptcy; formal studies linked with failure of business were conducted in 1930s. A study conducted by Simth and winakor (1935) said that ratios of the failing firms were significantly change from the continuing firms. In addition to that an other study was related to the financial ratio of large size corporation that suffered in meeting fixed liability (Hickman 1958). Recent studies took potential ratios given in annual financial statements like profitability, solvency, and liquidity ratios considered as the most predictive indicator and these ratios were matched with failed and well worth firms for analysis. A group of financial and economic ratios were examined in the prediction of bankruptcy through multiple discriminant statistical technique, highest contributor ratios were profitability, operational profit/ total assets and very low contributor ratio was working capital/Assets (Altman, 1968). A study conducted by Sandin and Porporato (2007) on corporate bankruptcy prediction model applied to emerging economies. The aim of this study was to find the predictability of bankruptcy by using the financial ratios given in the financial statements and these financial statements were taken from the Buenos Aires Stock Exchange. To test the hypothesis twenty two bankrupt and non bankrupt companies were examined by using the multiple discriminant analysis technique, resulted that financial ratios were very useful in predicting the bankruptcy. Actually this study was about the prediction model and classification of the distressed and failed companies in the Argentina. William Beaver (1996) conducted a study that Financial Ratios As Predictor of Failure, wherein ratios were tested for a specific purpose. The purpose was to forecast the failure. Since ratios were mostly examined for the prediction of failure. The aim of the study was to analyze the status quo that was depended on the financial statements made under the reporting standard and this study was conducted as a bench mark for further studies in bankruptcy area. Sample of data was selected on the basis of industry, firm size and period, Walworth companies should have taken from the same industry where from failed companies taken along with same firm size based on firm value and equal time duration then reliable result can be obtained said by Beaver (1996). This study pointed out and directed to the asset size and relationship among ratios, assets size and failure, study implicated that larger firms were more solvent than smaller firms, even if ratios were same. To examine the hypothesis, a paired analysis was used. According to Pastena and Ruland (1968), the bankruptcy was defined in the literature review in various ways. Among those one was in a condition of negative worth where the market value of assets was less than the total value of liabilities. And the other was that the firm was not in a condition to pay back its liabilities as it became due. This term could also be used in a legal condition under which the firms continued to operate under court protection. Merger and Bankruptcy Based on the literature review in the different research studies, it was found that the shareholders of the distressed firms were getting more benefit from mergers than from the bankruptcy. Thus, the investors kept the positive number of the firms stocks up as a consequence of the merger. Contrastingly, the stakeholders received nothing in case of the bankruptcy. Shrieves and Stevens (1979) managed to explain all of the possible reasons for preferring merger over bankruptcy and those principles included: (1) to avoid the bankruptcy legal and administrative costs, (2) possible loss of tax carry forwards of the loss firm incurred on liquidation, (3) the value of the going-concern in the merger was more than liquidation value if the firm bankruptcy progressed towards the liquidation, and (4) the bankruptcy created the bad effects on the revenues including sales and income due to the customer fears of inability contracts, give replacement parts, etc. Bulow and Shoven (1978) noticed based on the research that the investors have always been avoiding the bankruptcy and this tendency always benefitted the creditors as a whole and that theoretically, the bankruptcy occurred because of the disagreement between the concerned parties. This was treated in a literature that the merger was the best possible alternate of the bankruptcy with the assumption in the mind that it was more easy for the distressed firms to find a merger partner at some price as long as the net asset value was positive and this was also under the assumption of a well-functioning market for information. When the situation was aggravated toward a condition of less or negative net asset value, the possibility of merger was reduced. Hong (1983) made an empirical as well as theoretical model which distinguished among three different categories of financially upset firms and it was organized in three ways such as: firms which filed bankruptcy but reorganized successfully, firms which filed for bankruptcy but were liquidated ultimately, and also the firms which continued operations with out even filing for bankruptcy. Author further made a hypothesis that the intangible assets, the value of the firm as in a going concern and the value of the same firm in liquidation was different, were the main describing factor which affected the eventual outcome. The firms which had greater intangible assets were possibly having a sustainable economic growth and that growth allowed a firm to survive rather than be liquidated. LoPucki (1983) made an explanatory study of about 41 firms which filed the bankruptcy court of the Western District of Missouri. In this study, the à ¢Ã¢â€š ¬Ã…“successesà ¢Ã¢â€š ¬? were defined as the firms which have verified its various reorganization strategies that kept it on to survive for about three years after the date of petitioning the bankruptcy. Failures according to the author were those firms which had stopped operating functions before February 1983. LoPucki (1983) further could not try to make a method with discriminatory power, but in fact simply scrutinized the associations between the results of reorganization process and numerous individual variables. These individual variables included size, age, and type of the businesses, the survival of creditors opposition to the reorganization strategy, and physical geographic location. The relationships which were found during the research were: significantly higher success rate was associated with the manufacturing fi rms; more successful firms were only the larger firms; success was not significantly associated with the age of the firms; the target opposition of the creditors was mainly at the more successful firms; and lastly, the physical geographical location was not a significant describing variable. In short, only a finite amount of research was conducted on the topic of differentiating between failures and successes in bankruptcy, and outcomes have been open to doubts or inconclusive. The one published study conducted by the LoPucki (1983), scrutinized the first order correlations and could not struggle to build the model of classification. The other published research study conducted by Hong (1983), scrutinized the comparative importance of numerous individual variables and had not analyzed the classification authentication of the multivariate model. As it was already discussed in detail, this present study scrutinized the classification authentication of the multivariate model by using data from both analysis sample and a holdout sample 113 firms. Bordman, Bartley, and Ratliff (1981) noticed that firms went bankrupt only when its capital resources were not enough to pay back the obligations of the business. Thus it became the more important challenge for the new comers in the industry to maintain and establish such valuable resources and capabilities which could ultimately leaded to the production of positive cash flows before starting asset resources were exhausted (Levinthal, 1991). According to DAveni (1989), and Hambrick and DAveni (1988), both researches have noticed that most of the attention has been paid to the early failures and dramatic research has also been conducted in the literature. A macro view of the bankruptcy was given as a known strategy and an empirical examination of factors associated to successful reorganization (Moultan, and Thomas, 1993) and however, the structures of corporate governance were not incorporated in the analysis. An extensive data was available relating the intensity to which the officers and directors of the firm which was bankrupt were more possibly resigning or were being replaced (DAveni, 1990; Fizel Louie, 1990; Gilson, 1989). Several researchers used the multiple discriminant analysis MDA technique to develop a linear model to predict those firms which failed could be differentiated from the non-failed firms in UK (Taffler, 1977). This model resulted in an overall classification authentication for the year before the failure as comparative to three or two prior years of failure. The major contribution made by Taffler was the establishment of a Z-score model which was used for the prediction of company failures in the UK and furthermore, the author claimed of 100 percent predictive authentication in the model. In addition, in the consequent studies, Taffler (1982, 1983) discussed the pairing technique which was used in the prediction of corporate failure studies proved no more successful technique than any selection by the other tool or technique. Multiple Discriminant Analysis MDA models were dependable to certain intensity in the prediction of corporate failure. CHAPTER 3: RESEARCH METHODS 3.1 Method of Data Collection Data was selected from Karachi Stock Exchange KSE 100 Index as given by State Bank of Pakistan in publication Balance Sheet Analysis of Joint Stock Companies Listed on the KSE (2004-2009). The period of study covers six years, 2004-09. The opted sample size of 44 firms was taken from KSE 100 Index and all of the firms listed on KSE 100 Index were selected for the samples which were going to bankruptcy in the past and some were also the present functioning firms which were currently working; so, only 44 firms included in the sample period of 2004-09. The objective behind the inclusion of these selected firms in the sample was that the inclusion of bankrupt and non-bankrupt firms in the analysis made it easier to distinguish the critical financial ratios of these both firms in order to predict for corporate bankruptcy. The data availability was the major issue faced in this research study. The secondary data sources were adopted for the collection of the data during this research study. Both of the empirical and theoretical aspects regarding the prediction of corporate bankruptcy were analyzed in this research study. For the purpose of the collection of the secondary data, external data sources were used, such as the data was collected from State Bank of Pakistan, general business publications, newspapers and journal articles, annual reports, internet and books. The data required for this study was completely dependent on the published data sources, such as the published sources listed above. 3.2 Sample Size A sample of 44 firms from KSE 100 Index was selected and in addition, out of these firms 22 firms were bankrupt and the remaining 22 were not bankrupt which was taken as the holdout sample for the prediction of the corporate bankruptcy. Only firms were used in the samples which were either became bankrupt due to the impact of the some of the financial factors or the ratios or the firms which were in operations during the research study was conducted and these firms were listed on the KSE 100 Index form 2004-2009. The impact of the different financial factors or ratios, which were listed in the previous chapters, on the prediction of corporate bankruptcy was analyzed on all of the firms selected as the sample. 3.3 Research Model Developed There are various financial factors or the ratios of the firms which affected the prediction of the corporate bankruptcy of the firms. This research study analyzed the impact of different factors or ratios already listed in the previous chapters on the prediction of corporate bankruptcy. The model developed was a binary logistic model and its specifications are provided below: Liquidity = a0 + a1Firm Size + a2DEBT + a3LTD + a4LSALES + a5OI/S + a6OI/TA+ a7IGP/TA+ a8Market to Book Ratio + ц where: Liquidity = the sum of cash and marketable securities divided by total assets Firm Size = natural log of the book value of total assets DEBT = the ratio of shorter period plus longer period debt to total assets LTD = the ratio of longer period debt to total assets LSALES = natural log of the annual sales OI/S = the ratio of operating income to sales OI/TA = the ratio of operating income to total sales IGP/TA = the inventory plus gross fixed assets to total assets ratio à Ã¢â‚¬Å¾ = the error term 3.4 Statistical Technique Binary Logistic Regression Analysis technique was used for this research study to examine the impact of the distinctive financial characteristics or the financial ratios of the firms on the prediction of corporate bankruptcy of the selected firms; Statistical Package for the Social Sciences (SPSS) was used for the examination of the secondary data. Binary Logistic Regression Analysis technique was used for the purpose of prediction of of corporate bankruptcy or the prediction of the firms decisions to file for bankruptcy. The selected technique was used to study the impact of the different independent variables (financial factors as listed in the previous chapters) on the dependent variable i.e., prediction of corporate bankruptcy. The binary logistic regression analysis was selected for this study. It showed the intensity of the impact on the prediction of corporate bankruptcy during year 2004-2009 on the basis of several independent variables. CHAPTER 4: RESULTS The sample of 44 firms from the Karachi Stock Exchange KSE 100 Index was taken; Binary Logistic Regression Analysis technique was used for this research study. Research examined the distinctive financial characteristics or financial ratios of firms which filed for the bankruptcy. The selected technique was used to study the impact of the different independent variables (financial factors as listed in the previous chapters) on the dependent variable i.e., the prediction of corporate bankruptcy. Statistical Package for the Social Sciences (SPSS) was used for the analysis and examination of data. 4.1 Findings and Interpretation of the results Initially, the binary logistic regression technique was applied on the data collected using SPSS. Now, it was a nice time to proceed with the analysis of the results because the data was collected and ready to be examined. The interpretation and analysis is presented in the next sections of this research study. Case Processing Summary Unweighted Casesa N Percent Selected Cases Included in Analysis 192 91.4 Missing Cases 18 8.6 Total 210 100.0 Unselected Cases 0 .0 Total 210 100.0 This table explains the total population in the data file that is the 210 observations or the cases for the analysis of the bankruptcy prediction. This table further elaborates that the there were also some of the cases missing in the data because of the issue of data availability and some of the cases were the figures of zero. Dependent Variable Encoding Original Value Internal Value Bankrupt 0 Non-Bankrupt 1 The above table shows that there are only two variables in the dependent variable of bankruptcy that are the being bankrupt or non-bankrupt. Model Summary Step -2 Log likelihood Cox Snell R Square Nagelkerke R Square 1 234.707a .144 .192 This table elaborates the predictability of the complete model of the logistic regression which meant that to what extent the model predict the variation in the predicted group of bankruptcy. According to Cox Snell, the total predictors jointly explained variation in the groups of bankruptcy was 14.4%. While according to Nagelkirki, the all independent variable explained the group prediction of about 19.2%. Hosmer and Lemeshow Test Step Chi-square df Sig. 1 32.715 8 .000 This table checks the overall model fit which means that the model is at its best in predicting the group variation from non-bankrupt to bankrupt. The hypothesis of the above table is that the test model is fit. The hypothesis is rejected because the sig value is less than .05 which concluded that the test model was not fit in this case of predicting the group variation. Classification Tablea Observed Predicted Banckruptcy Percentage Correct Bankrupt Non-Bankrupt Step 1 Banckruptcy Bankrupt 76 29 72.4 Non-Bankrupt 43 44 50.6 Overall Percentage 62.5 The classification table is the most important table in case of the logistic regression because this table explained the correct identification of the cases correctly identified. The percentage of correctly identified cases is 62.5% which is also commonly known as the hit ratio which means that to what extent the numbers of cases were correctly identified. Variables in the Equation B S.E. Wald df Sig. Exp(B) 95% C.I.for EXP(B) Lower Upper Step 1a DA -1.219 .510 5.725 1 .017 .295 .109 .802 AtoLTD -.002 .001 1.583 1 .208 .998 .996 1.001 CR .938 .348 7.242 1 .007 2.554 1.290 5.056 NPM .037 .073 .262 1 .609 1.038 .899 1.198 SG .161 .232 .482 1 .488 1.175 .745 1.852 Constant .066 .579 .013 1 .910 1.068 This is the final most important table in the logistic regression because this is the only table which shows the role of different predictors in significantly explaining the role in the prediction of group variations. Those important significant variables were only two that were DA, and CR because the sig value of only these variables were less than .05. 4.2 Hypotheses Assessment Summary The hypothesis of the study was distinctive financial ratios have significant impact on the non firms decision to file for bankruptcy. These financial characteristics were current ratio (CR), debt ratio (DA), net profit margin (NPM), assets to long term debt ratio, and growth rate. In this study each of the financial characteristics or financial ratios of firms was tested and concluded the results. TABLE 4.4 : Hypotheses Assessment Summary S.NO. Hypotheses ÃŽÂ ²       SIG. RESULT H1 There is a difference between the Current ratio of bankrupted companies and non bankrupted companies. 0.938 0.007 Accepted H2 There is a difference between the Debt Ratio of bankrupted companies and non bankrupted companies. -1.219 0.017 Accepted H3 There is a difference between the Net Profit Margin Ratio of bankrupted companies and non bankrupted companies. 0.037 0.609 Rejected H4 There is a difference between the Assets to long term debt ratio of bankrupted companies and non bankrupted companies. -0.002 0.208 Rejected H5 There is a difference between the Growth rate of bankrupted companies and non bankrupted companies. 0.161 0.488 Rejected CHAPTER 5: DISCUSSIONS, CONCLUSION, IMPLICATIONS AND FUTURE RESEARCH 5.1 Conclusion It was concluded based on the results of this research study that current ratio and debt ratio were only the independent variables which were showing significance in Pakistani market and these variables were highly significant in playing the vital role explaining the variation in the dependent variable of the prediction of corporate bankruptcy and the remaining independent variables could not explain the variation in the prediction of corporate bankruptcy. These results were not matching with the study conducted by Altman (1968). These results were varying because in various countries, there was difference in environments and circumstances and firms usually made decision accordingly. 5.2 Discussions Current ratio played a significant role in defining the variation in the prediction of corporate bankruptcy and this was also the case with the research study conducted by Altman (1968) because in his study the firm size was also playing a significant role. The variation in the prediction of corporate bankruptcy was not explained by the net profit margin ratio while it was significant in the study done by Altman (1968). The assets to long term debt ratio, and growth rate were not significantly explaining the variation in the prediction of corporate bankruptcy and study analyzed by Altman (1968), concluded the different results with some addition. 5.3 Implications and Recommendations This research was limited to the various firms listed on Karachi Stock Exchange of Pakistan only. The data taken from 44 firms which were took through various sectors of the KSE 100 Index for the year 2004-09 which were previously bankrupt and which were currently operating. It suggested that such type of study should be carried out in other countries of Asia as well, as to have comprehensive idea about the choices of the firms decision to file for bankruptcy. Moreover, it also suggested that other factors except ones examined in this study should be researched as to have perfect idea about the selection of the prediction of corporate bankruptcy. Besides that, this study can also be replicated in other developing countries. 5.4 Future Research This study helped various investors, management and other research conductors in analyzing and observing the behavior of firms regarding their decisions to file for the bankruptcy. Research students who want to work further on the prediction of bankruptcy can be benefited by this research study. Further more, the firms will become advantageous from this study because the study clarifies the distinctive financial characteristics or the financial ratios of different firms which significantly explain the variations in the prediction of corporate bankruptcy.

According to the US Department of Labor Essay

* The time employees spend in meetings, lectures, or training is considered hours worked and must be paid, unless attendance is outside regular working hours, the attendance is voluntary, the course, lecture, or meeting is not job related or the employee does not perform any productive work during. attendance. * If employees on their own initiative attend an independent school, college, or independent trade school after hours, the time is not hours worked for their employer even if the courses are related to their jobs http://www.dol.gov/overtime Based on the above considerations, the employee has no potential FLSA claim because the overtime he is claiming is not required by the company to perform his physical tests. He can stay fit and in shape and can be trained well with in his job itself and there is no requirement by the company to take additional training to continue to stay in SWAT but he felt that he needed extra training and has nothing to with the company. So as per FLSA Mr.Murphy has no potential claim to collect the overtime for 36 months. See more: Satirical elements in the adventure of Huckleberry Finn essay The five things an employer can do to insure compliance with FLSA and avoid claims are: 1.Classify the employees properly Try to classify the employees based on exempt and non-exempt status based on FLSA regualtions. There is a whole list of exempt employees according to US department of labour and some of that list includes: * Commissioned sales employees of retail or service establishments are exempt from overtime if more than half of the employee’s earnings come from commissions and the employee averages at least one and one-half times the minimum wage for each hour worked. You may also wish to review the applicable regulation. * Computer professionals: Section 13(a)(17) of the FLSA provides that certain computer professionals paid at least $27.63 per hour are exempt from the overtime provisions of the FLSA. * Drivers, driver’s helpers, loaders and mechanics are exempt from the overtime pay provisions of the FLSA if employed by a motor carrier, and if the employee’s duties affect the safety of operation of the vehicles in transportation of passengers or property in interstate or foreign commerce. You may also wish to review the applicable regulation. * Farmworkers employed on small farms are exempt from both the minimum wage and overtime pay provisions of the FLSA. You may also wish to review the specific regulation. Young workers employed on small farms, with parental consent, are also exempt from the child labor provisions of the FLSA. For more information on exemptions from the child labor provisions of the FLSA in agriculture, click the underlined text. Other farmworkers are exempt from the FLSA’s overtime provisions. You may also wish toreview the specific regulation. * Salesmen, partsmen and mechanics employed by automobile dealerships are exempt from the overtime pay provisions of the FLSA. You may also wish to review the applicable regulation. * Seasonal and recreational establishments: Employees employed by certain seasonal and recreational establishments are exempt from both the minimum wage and overtime pay provisions of the FLSA. You may also wish to review the applicable regulation. * Executive, administrative, professional and outside sales employees: and who are paid on a salary basis are exempt from both the minimum wage and overtime provisions of the FLSA. Direct reference: http://www.dol.gov/elaws/esa/flsa/screen75.asp And there are other exempted categories and to avoid potential claims, the handbook of US department of labour should always be checked while running the payroll. 2.Run a proper payroll as per the standards and so there will not be any issues later when faced a claim. 3. Conduct workshops among employees to make them understand the overtime exemptions and non-exemptions. 4.For the exempt employees make sure the wages are paid for the normal working hours to avoid any discriminatory claims. 5.Document the non-exempt employees work hours accurately If taken care and treat all employees fairly as per the standards and creative a crystal clear environment and pay with the transparency there will not be any potential claims. References: http://www.dol.gov/overtime http://www.dol.gov/elaws/esa/flsa/screen75.asp

Health care economics history Essay

Before 1900, there really wasn’t what you could call major health care in this country. The American Medical Association (AMA) was just getting off the ground, hospitals were just getting established, doctors still made house calls and traded their services for goods, and people still used a lot of home remedies to treat their ailments. Health insurance was unheard of! Between the years 1750 and 2000, healthcare in the United States evolved from a simple System of home remedies and itinerant doctors with little training to a complex, scientific, Technological, and bureaucratic system often called the â€Å"medical industrial complex The history and evolution of health care economics involve economist analyzing the health care system. Over the past 60 years health care scientific advancement and economic growth have persisted. Modern advances in health care are driven by market prices. Economists must follow the flow of money to understand health care decisions. Healthcare funding is very complex and assist individuals in ensuring quality service is provided. Thus economist’s decision-making affects the health care system and advancements made. Economists think of strategic solutions to improve the way health care operates. Economists make decisions that affect individuals’ lives. According to wikipedia (2010) the history of economic thought deals with different thinkers and theories in the subject that became political economy and economics from the ancient world to the present day. Economics is the science that deals with the production, distribution, and consumption of goods and services. The moral obligation of businesses is to sell goods at a just price for individuals to consume. In the 1900s individuals paid out of their own pocket for health insurance. No one needed health insurance because it did not cost much. The healthcare system started around the 1920s where the employers paid for individual’s health insura nce. Healthcare began to grow with much more effective treatments and for much more money. Medicines became effective,  research increased, and medical schools expanded to teach physicians proper treatment methods. When people became ill they were willing to pay for their care. The health insurance system began According to Blumberg and Davidson (2009) Thomasson says that if the Great Depression inadvertently Health care economics have drastically altered over the course of annals in the United States. While some can assist these alterations due to the evolutionary alterations the US has undergone since her inception, the foremost assisting components that leverage the alterations in wellbeing care economics are improvement in expertise and health care. By comprehending the annals of wellbeing care economics, and recognize the flow of capital scheme, economic managers are adept to be more amply arranged for the future. It is crucial to recall that the propelling force behind wellbeing care economics is cash, and it performances an integral part to the achievement of the wellbeing care industry. Who buys for what has altered spectacularly in the past 60 years. Whereas in the past, the most of persons paid their health accounts with personal capital, today protection companies are responsible for the cost. Discussed will be the history, evolution of health care economics, the timeline of funding, and its terms. However, individuals give only a little part of the total flow of capital with personal money. The flow of capital is a scheme in which economic managers are adept to â€Å"follow† the cash through the wellbeing care scheme, and as asserted overhead the primary flow of capital have drastically altered from past years. History displays that numerous physicians would trade services for non-money pieces (such as kernel, cotton fabric, livestock, etc.) as types of fee if the one-by-one was incapable to use money. Essentially, these physicians were tradesmen, with the persevering giving one century per hundred of the cost for health services rendered. As the US started to advancement, with improvement in expertise and other chronicled components, a new scheme had to be put into location to help the American community in buying health services. Every year, the United States allots a restricted allowance of cash that may be expended on wellbeing care. The United States health care system is currently getting ready to evolve tremendously through the organization, management structure, and payment structures. The economic component in health care is very important to understand in order to structure it successfully. This papers discusses the evolution of economics in the health  care system and the structure of health care funding timeline. History and Evolution Health care economics presents an information framework were efficiency and equity goals are pursued. Furthermore, economics establishes a framework by maximizing benefits using resources at hand. Kenneth Arrow, the person responsible for mentioning the idea of health economics as a discipline, wrote an article titled â€Å"Uncertainty and the Welfare Economies of Medical Care† in 1963. The article discusses how the medical care industry benefits society compared to the â€Å"norm†. Furthermore, Mr. Arrow wrote about the significance of supply and demand. Arrow discussed that the average person has the characteristic of only seeking medical care when they are suffering from a critical injury or illness. It’s not common for the average person to receive routine medical services on a regular basis. As Mr. Arrows discussed supply condition, he quoted â€Å"Entry to the health care profession is controlled by licensing. Licensing manages the supply which consequentl y increases the cost of medical care. Davis, H. (2003). National center of biotechnology. Retrieved from http://WW.NCBI.NLM.GOV

Francis Bacon and Rene Descartes - 2288 Words

| Connections and Contrasts of Francis Bacon and Rene Descartes | | | | The Discourse on the Method of Rightly Conducting Ones Reason and of Seeking Truth in the Sciences is one of the most influential works in the history of modern philosophy, and important to the evolution of natural sciences. In this work, Descartes tackles the problem of skepticism. Descartes modified it to account for a truth he found to be incontrovertible. Descartes started his line of reasoning by doubting everything, so as to assess the world from a fresh perspective, clear of any preconceived notions. Whereas Francis Bacon’s Scientific Method wanted to replace the deductive reasoning by inductive reasoning. The important concept in this reformed†¦show more content†¦It is still practiced in some universities and will be practiced up until the 18th century at least. Three fundamental changes have occurred during the Renaissance; Aristotle portrayed the understanding of the universe, Galen described the importance of medicine and to understand astronomy Ptolemy described it. In 200 years there has been a revolutionary change, Rene Descartes and Isaac Newton have replaced Ptolemy in astronomy. Galileo has replaced Aristotle in physics. Harvey has replaced Galen in medicine. The three ancient authorities have been over thrown. In Rene Descartes’ Discourse on Method he expresses his disappointment with traditional philosophy and with the limitations of theology; only logic, geometry and algebra hold his respect, because of the utter certainty which they can offer us. Unfortunately, because they depend on hypotheses, they cannot tell us what is real, i.e. what the world is really like. 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