10.1 INTRODUCTION. Business failure identification and early warnings of im-
pending financial crisis are important not only to analysts and practitioners in the
United States. Indeed, countries throughout the world, even noncapitalist nations,
have been concerned with individual entity performance assessment. Developing
countries and smaller economies, as well as the larger industrialized nations of the
world, are vitally concerned with avoiding financial crises in the private and public
sectors. Some policy makers in smaller nations are particularly concerned with fi-
nancial panics resulting from failures of individual entities.
From the late 1960s to the present day, numerous studies in the United States were
devoted to assessing one’s ability to combine publicly available data with statistical
classification techniques in order to predict business failure. Studies by Beaver
(1966) and Altman (1968) provided the stimulus for numerous other papers. One of
the first attempts at modern statistical failure analysis was performed by Tamari
(1964). We will not discuss his work here, but we point out its pioneering status. A
steady stream of failure prediction papers have appeared in the English literature, and
numerous textbooks and monographs include a section or chapter on these models.
What has gone relatively unnoticed is the considerable effort made to replicate and
extend these models to environments outside the United States. With the exception
of two special issues of the Journal of Banking and Finance(1984 and 1988), edited
by one of the authors of this article, there is no work with which we are familiar that
attempts to survey these studies and to comment on their similarities and differences.
The purpose of this paper is to do just that.
We survey the works by academics and practitioners in 21 countries and give ref-
erences to several other studies. This survey will bring together these myriad studies
and highlight study designs, innovations, and outcomes that will be of practical value
to researchers and practitioners. While the economic forces shaping the outcomes in
various countries may diverge, the researchers share a striking similarity in their ap-
proach to distress prediction. For example, nearly every study contrasts the profile of
failed firms with that of healthier firms to draw conclusions about the coincident fac-
tors of failure. Causal studies of failure appear to be comparatively rare.
In several of the countries studied, notably Brazil, France, Canada, Australia,
Korea, Mexico, and Italy, one of the authors of this article has participated directly
10 • 2 BUSINESS FAILURE CLASSIFICATION MODELS10.12 Greece 28
(a) Gloubos and Grammatikos
(1988) 28
(b) Theodossiou and Papoulias
(1988) 30
10.13 Argentina 31
(a) Swanson and Tybout (1988) 31
10.14 Brazil 32
(a) Altman, Baidya, and
Ribeiro-Dias (1979) 33
(b) Empirical Results 34
(c) Implications of Results for
Brazil 35
10.15 India 35
(a) Bhatia (1988) 35
10.16 Ireland 36
10.17 Korea 37
(a) Altman, Kim, and Eom
(1995) 37
10.18 Malaysia 38
(a) Bidin (1988) 38
10.19 Singapore 40
(a) Ta and Seah (1988) 40
10.20 Finland 42
(a) Suominen (1988) 42
10.21 Mexico 43
(a) Altman, Hartzell, and Peck
(1995) 43
10.22 Uruguay 44
(a) Pascale (1988) 44
10.23 Turkey 46
(a) Unal (1988) 46
10.24 Summary 47SOURCES AND SUGGESTED
REFERENCES 47