Two-Stage Failure Prediction Model
Mahidol University Annual Research Abstracts 2000 15 TWO-STAGE FAILURE PREDICTION MODEL Somchai Pathomsiri Department of Civil Engineering, Faculty of Engineering, Mahidol University, Salaya, Nakhonpathom Province, 73170 Thailand. E-mail: egspt@mahidol.ac.th
Key words : Financial Model, Failure Prediction, Financial Crisis
During the economic crisis 1997, 56 out of 91 finance companies in Thailand had been ordered permanently "closed" by Bank of Thailand (BOT). This research analyses financial status of all finance companies and then proposed mathematical models for failure prediction. Unlike other past research works, Binary Logistic model was applied rather than Multiple Discriminant Analysis (MDA). The data for calibration is based on financial ratios calculated from financial statements as of December 1996, one year before the crisis.
The best two models are proposed. Both models consist of 3 variables. Model I consists of Interest Income/Interest Expense, Interest Expense/Total Assets and Liquid Assets/Total Assets while model II consists of Total Equity/Total Assets, Liquid Assets/Total Assets and Bank Holder. Bank holder is defined as "whether the company has financial backup from firm institutions?" All variables appeared in both models, not only can logically explain the financial status of companies but also correspond to the criteria of BOT.
Model II shows higher prediction capability than model I. When tested by 71 initial samples, average correct predictions are 81.69 % and 94.37 % for model I and model II respectively. If tested with 20 hold _ out samples, correct percentages are 60 % and 95 % for model I and model II respectively. In order to improve explanatory power and prediction capability, the researcher proposed to combine two models as one, called "Two-stage Prediction Failure Model". Test shows 95 % correct prediction with only Bangkok Asian Finance Co., Ltd. missed. Surprisingly, it has been ordered "closed" under the BOT's measure on August 14, 1998.
The model can also be applied for management purpose. By doing sensitivity analysis of financial ratios in the Two-stage Prediction Model, greatly help management plan for a set of safe and healthy company's financial structures.
(Presented at The 7th Advanced Research Convention on Capital Markets, October 22, 1999, at The Faculty of Commerce and Accountancy, Thammasat University, Thailand.)
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