A corporate failure prediction model for non-financial South African corporates incorporating best practices used by the credit industry

Rowlings, Douglas

A corporate failure prediction model for non-financial South African corporates incorporating best practices used by the credit industry

Master Thesis

2016

Publisher

University of Cape Town

Department

Department of Finance and Tax

Faculty

Faculty of Commerce

Abstract

In the context of the current macroeconomic environment there is an expectation of an increase in South African non-financial corporate failure, where advance prediction thereof will become even more important. A number of South African non-financial corporate failures have occurred following the financial crisis. In addition, South Africa experienced a watershed moment with the first default on a non-financial corporate bond in 2013. At the same time, with the adoption of the International Financial Reporting Standards (IFRS) framework there have been significant advances in the quality of financial information which should improve its usage in predicting corporate failure. This study used the latest sample to date of listed South African non-financial corporates that met the definition of failure but limited the universe of financial information to that which was prepared under IFRS. At the same time, adjustments were made to the financial data based upon pre-selection of independent credit statistic variables most commonly used in ranking relative credit risk for non-financial corporates. Additionally, equity market price data was introduced into the model to add a forward-looking information consideration. This resulted in an eleven variable model where differentiation of corporate failure was facilitated through the use of multiple discriminant analysis.

Keywords

Finance and Tax

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