Proceedings

The main advantage of DA is obtaining classification functions, which will allow the
subsequent inclusion of the companies that are not part of the analyzed sample, in
predictive purposes. The coefficients associated with the indexes of the evaluation
methods are presented in Table 4, and the classification functions obtained have the
form: ScoreInsolvent = -0.899 -0.075IEV + 0.180IMC +0.093IVFCF and ScoreSolvent = -
0.005IEV + 0.266IMC -0.017IVFCF. By replacing the two variable functions with the
data presented by a company that will have to be classified into one of the two
categories, two score values will be obtained (a value for ScoreInsolvent and a value for
ScoreSolvent). These values will be compared, and the highest value will also determine
the company’s belonging to one of the two categories.
In what concerns the LRA method, the main results obtained in SPSS concern the
functions for determining the probability of occurrence of the insolvency risk for a
comoany, after the application of each evaluation method. For an analyzed company,
the three probabilities of occurrence of the insolvency risk will be compared,
according to the used method, with the purpose of their classification. Moreover,
based on the probability computing functions, LRA allows a series of comparisons in
what concerns the correct classification of the analyzed companies into the insolvent/
solvent groups. This way, the method used to obtain a classification function that has
the fewest wrongly classified cases will be the method that best indicates the absence
of the insolvency risk and implicitly a faithful image. The obtained results are
synthesized in Table 5, and for the interpretation of the function coefficients, their
exponential value (exp) will be used.
Variables
Table 5. Results obtained through LRA
Exponential coefficients of the
probability
EV MC VFCF
~ 196 ~
Correctly forecast cases
Solvent Insolvent
IEV 0.183 - - 75% 55%
I MC - 0.862 - 40% 80%
I VFCF - - 1.243 60% 50%
Constant 0.557 1.067 0.975 - -
(*Sig < 0.5)
Starting from the results obtained in SPSS, based on the coefficients associated to the
variation indexes of the evaluation methods, it is possible to obtain the functions for
determining the probabilities of occurrence of the insolvency risk. Therefore, for each
method, a probabilistic model of the insolvency risk will be obtained, having the
form:
EV: [pinsolvent/(1-pinsolvent)] = 0.557·(0.183)^IEV;
MC: [pinsolvent/(1-pinsolvent)] = 1.067·(0.862)^IMC;
VFCF: [pinsolvent/(1-pinsolvent)] = 0.975·(1.243)^IVFCF;
Therefore, for IEV = 0 (the company has not recorded any modifications of EV), the
probability for a company to be bankrupt and not solvent is 0.557 (the ratio between
the probabilities for the two states), and an increase of the index by one unit (IEV = 1,
double EV) will amplify this risk by 0.183, eventually generating an insolvency risk
of 0.102 (0.557·0.183). The EV method successfully indicates 75% of the solvent
companies (error 25%) and 55% of the insolvent companies (error 45%), resulting in