An Alternative Model for Bankruptcy Prediction under Stressed Conditions: The Case of Listed Companies in Greece and Cyprus

Abstract

Firm bankruptcies have been tantalising investors, risk managers, markets, entrepreneurs/ investees, regulators, or even the State/ government as they may cause disruptions in the modus operandi of the interested stakeholders. The period during and after the financial and the subsequent sovereign crisis proved to be important from that perspective, especially for countries that faced an extended adverse economic environment, such as Greece and Cyprus. This study attempts to predict bankruptcies of listed manufacturing firms domiciled in Greece and Cyprus by introducing a bankruptcy prediction model that employs discriminant analysis (DA) over a balanced matched sample of 42 firms for the period 2008-2015. Evidence is provided that a series of financial ratios (quick ratio, cash flow interest coverage, and economic value added (EVA) divided by total assets) significantly affect the predictability of bankruptcies in both countries. As a matter of fact, the tested determinants exhibited strong classification accuracy, well in advance (three years), reflecting the global financial health of the firm under examination. This can be a valuable tool in the hands of the involved stakeholders, such as investors, risk officers, and the competent authorities.