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THE RELATIVE IMPORTANCE OF FINANCIAL RATIOS AND NONFINANCIAL VARIABLES IN PREDICTING OF INSOLVENCY

Authors
Publisher
Croatian Operational Research Society; [email protected]
Publication Date
Keywords
  • Insolvency Prediction
  • Financial Ratios
  • Nonfinancial Variables

Abstract

One of the most important decisions in every bank is approving loans to firms, which is based on evaluated credit risk and collateral. Namely, it is necessary to evaluate the risk that client will be unable to repay the obligations according to the contract. After Beaver's (1967) and Altman's (1968) seminal papers many authors extended the initial research by changing the methodology, samples, countries, etc. But majority of business failure papers as predictors use financial ratios, while in the real life banks combine financial and nonfinancial variables. In order to test predictive power of nonfinancial variables authors in the paper compare two insolvency prediction models. The first model that used financial rations resulted with classification accuracy of 82.8%, while the combined model with financial and nonfinancial variables resulted with classification accuracy of 88.1%.

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