10.3 SWITZERLAND
(a) Weibel (1973). While bankruptcy classification and its many implications have
interested researchers in Germany for many years, the earliest major work published
in German was performed in Switzerland by Weibel (1973). He constructed a sample
of 36 failed Swiss firms from 1960 to 1971 and matched them to a like number of non-
failed firms in terms of age, size, and line of business. Using univariate statistical para-
metric and nonparametric tests, Weibel analyzed ratios of these two groups in much
the same way that Beaver (1967) did. He found that many of the individual ratios were
non-normal and so he abandoned multivariate tests [We have often referred (Altman
et al., 1977) to the non-normality problem which exists in many economic and finan-
cial data sets but we prefer to test the robustness of models using such data rather than
abandoning the tests. We do observe that some European researchers have found mul-
tivariate studies suspect due to the non-normality properties of financial measures].
Out of 41 original ratios, Weibel selected 20 for dichotomous comparisons. He uti-
lized cluster analysis to reduce collinearity and arrived at the conclusion that six ra-
tios were especially effective in discriminating among the paired groups. Three ratios
were types of liquidity measures with one (near monetary resource assets-current li-
abilities/operating expenditures prior to depreciation) performing best. He also found
that inventory turnover and debt/asset ratios were good individual predictors. He ex-
amined the overlapping range of individual ratios for the two groups and presented
somead hocrules for identifying failures. He then divided the observations into three
risk groups. The low-risk group had all six ratios in the interdecile range of good
firms; high-risk firms had at least three ratios in the interdecile range of failed com-
panies; and a final category was identified where the firm does not fall into either of
the other two groupings. Weibel’s results were quite accurate in the classification
stage; we have no documentation on how his “model” performed on holdout tests and
what has been the evolution of models in Switzerland since his original work.
10.4 GERMANY
(a) Beerman (1976). Many studies in Germany have investigated the causes and
problems of insolvencies, especially for financial organizations. Beerman (1976)
published one of the first German statistical classification models for insolvency
analysis. He examined matched groups of 21 firms that operated or failed in 1966
through 1971. Applying dichotomous and linear discriminant tests, he analyzed 10
ratios encompassing profitability, cash flow, fixed asset growth, leverage, and
turnover. His results, using the difference in means dichotomous test, were mixed,
with one ratio type (profitability) yielding quite respectable results. The other ratios
were far less impressive on a univariate basis.
Beerman advocates using discriminant analysis, and his 10-ratio model yielded
classification error rates of 9.5%, 19.0%, 28.6%, and 38.1% for the four years prior
to failure. He does not indicate which model to use, and the coefficients of each
measure were quite unstable in the four different year models. Also, we are given no
indication of holdout test results or predictive accuracy and, due to the small sample,
we do not have confirming evidence of the model(s) reliability.
(b) Weinrich (1978). Weinrich’s (1978) book, from his dissertation, attempted to
construct risk classes in order to predict insolvency. His sample of failed firms was
10 • 8 BUSINESS FAILURE CLASSIFICATION MODELS