Failure Prediction: Evidence from Korea

J. OF INTERNATIONAL FINANCIAL MANAGEMENT AND ACCOUNTING, Vol. 6 No. 3

Posted: 5 Jul 1998

See all articles by Edward I. Altman

Edward I. Altman

New York University (NYU) - Salomon Center; New York University (NYU) - Department of Finance

Young Ho Eom

Yonsei University

Dong Won Kim

The University of Suwon

Abstract

This study is an attempt to construct and test a distress classification model for Korean companies. Utilizing a sample of 34 distressed firms from the recent 1990-1993 period and a matched (by industry and year) sample of non-failed firms, we observe the classification accuracy of two models. Both models utilize measures of firm size, asset turnover, solvency and leverage with one model available for testing only on publicly traded companies and one model applicable to all public and private entities. We observe excellent classification accuracy based on data from the first two years prior to distress. And, although the accuracy drops off after t-2, the models still provide effective early warnings of distress in many cases. The results of this study are of particular relevance in the current financial market scenario of increased deregulation and greater individual financial institution decision making. It is somewhat ironic for us to be proposing the use of a financial distress early-warning model given the current robust economic growth and low bankruptcy rate in Korea. But, the financial problems in Japan are a sobering reminder that high growth can be followed by financial excesses, increased business failures and large loan losses.

JEL Classification: F12

Suggested Citation

Altman, Edward I. and Eom, Young Ho and Kim, Dong Won, Failure Prediction: Evidence from Korea. J. OF INTERNATIONAL FINANCIAL MANAGEMENT AND ACCOUNTING, Vol. 6 No. 3, Available at SSRN: https://ssrn.com/abstract=7160

Edward I. Altman (Contact Author)

New York University (NYU) - Salomon Center ( email )

44 West 4th Street
New York, NY 10012
United States
212-998-0709 (Phone)
212-995-4220 (Fax)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Young Ho Eom

Yonsei University ( email )

College of Business and Economics
Seoul 120-749
South Korea
+82 2 361 4193 (Phone)
+82 2 392 0504 (Fax)

Dong Won Kim

The University of Suwon

Suwon-City, Gyeonggi
Korea

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