A new dynamic geometric approach for empirical analysis of financial ratios and bankruptcy

Alireza Bahiraie; A.K.M. Azhar; Noor Akma Ibrahim

doi:10.3934/jimo.2011.7.947

Article Contents

2011, Volume 7, Issue 4: 947-965. Doi: 10.3934/jimo.2011.7.947

This issue Previous Article Superconvergence property of finite element methods for parabolic optimal control problems Next Article A variational problem and optimal control

A new dynamic geometric approach for empirical analysis of financial ratios and bankruptcy

1.
Institute of Mathematical Sciences, Faculty of Science, University of Malaya, 50603 Kuala Lumpur
2.
Graduate School of Management, University Putra Malaysia, 43400 Serdang, Selangor
3.
Institute for Mathematical Research, University Putra Malaysia, 43400 Serdang, Selangor

Received: April 2009

Revised: July 2011

Published: October 2011

Abstract / Introduction Related Papers Cited by

Abstract

This paper presents a complementary technique for the empirical analysis of financial ratios and bankruptcy risk using financial ratios. Within this new framework, we propose the use of a new measure of risk, the Dynamic Risk Space (DRS) measure. We provide evidence of the extent to which changes in values for this index are associated with changes in each axis's values and how this may alter our economic interpretation of changes in patterns and directions. In addition, this model tends to be generally useful for predicting financial distress and bankruptcy. This method would be a general methodological guideline associated with financial data, solving some methodological problems concerning financial ratios such as non-proportionality, non-asymmetry and non-scaled. To test the procedure, Multiple Discriminant Analysis (MDA), Logistic Analysis (LA) and Genetic Programming (GP) are employed to compare results by common and modified ratios for bankruptcy prediction. Classification methods outperformed using the DRS approach.

Keywords:

Mathematics Subject Classification: Primary: 90B50 Secondary: 91B30, 91G40, 91B06.

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