Industrija 2/2011 - Ekonomski institut

I n d u s t r i j a 2 / 2 0 1 1 .
Analyzing single cases of bankruptcy in 2009 no cases of Type 1 error have
been observed (i.e. there have not been any companies which went bankrupt
and which were not classified in Distress zone (100% accuracy of prediction).
However, from 21 analyzed companies that went bankrupt in 2010, 18 had a
negative As index in the previous year (86% of prediction), while 3 companies
had a positive As index.
Looking at the 2 year period preceding the bankruptcy, out of 21 companies 14
had a negative As index (67% accuracy of prediction), while 7 companies had
positive As index.
So, there have been some cases of Type I error in the two-year period,
Table 4 shows that ten companies which in 2008. were in “distress zone” didn‟t
fail (86% accuracy of the prediction), i.e. 12 companies in 2009. (84% accuracy
of prediction).
Therefore there have been Type II error, which was more significant then Type I
error. Thus, we can consider this useful to a certain limited extent.
4. CONCLUSION
Altman suggest that ratio analysis presented in this form is susceptible of
erroneous and potentially confused interpretations, for example, a firm with poor
earnings an (and/or solvency record usually considered as potentially bankrupt),
can be considered not to have serious problems if the company has above
average liquidity. So, bankruptcy is a behavioral event since two companies,
with similar economic and financial situation, can face different situations. As
Sandin and Porporato mention, one company can operate normally and the
other can face a creditor agreement or a bankruptcy process because a
manager, a creditor, a shareholder or the government steps in.
Sandin & Porporato‟s model have limitations based on the non-normality of
variables, small sample size, diversity of industries, behavioral aspects, etc.
Besides that, creators themselves recognize a serious limitation in their work;
the conclusions cannot be definitive given the number of companies that
compose the sample. Besides that, the model does not take into account
aggregate economic conditions exogenous to individual firms such as the effects
of real interest rates or exchange rate policies. Even knowing the importance
that exogenous conditions can have in corporate failure, Sandin and Porporato‟s
study mainly focused on determining the usefulness of financial statements as
bankruptcy predictor.
Sandin&Porporato‟s use companies from various industries. It was confirmed
that it is not easy to find a classification and prediction model that is useful for
different industries and can survive changes in the time and geographical
environment. As Sandin and Porporato mention, different industries have
dissimilar productive resources, product cycles, competitive structures and
distribution channels. All of this provokes industry differences in evaluating
financial conditions; the same value of a ratio has different meanings in
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