considerably larger (44) than Beerman’s, concentrating on small and intermediate-
size firms, with average sales of DM 4 million (less than $2 million), that failed from
1969 through 1975. Weinrich considered three consecutive annual financial state-
ments (Years 2 through 4 prior to failure) but did not utilize the one statement clos-
est to insolvency. This is a marked difference from most of the other models we have
studied.
Weinrich abandoned the use of parametric classification techniques because of his
feeling that many assumptions were violated (normality, variance homogeneity of
groups, and high correlation amongst the variables). His linear discriminant models
were quite good in terms of classification accuracy (11% error for Year 2, 15.7% and
21.9% for Years 3 and 4, respectively).
Weinrich did use factor analysis and found the technique useful, indicating at
least six different factors that explained 80% of the variance of the ratios. He then
devised a model of credit-worthiness that contained eight relatively independent ra-
tios and utilized both univariate and multivariate methods. A point evaluation sys-
tem was devised based on quartile values of good and bad firms. For example, a net
worth/debt ratio over 43.3% receives the best (lowest) point value. A firm with sig-
nificant insolvency potential is one with 24 points or more (an average of three for
each of the eight ratios). This arbitrary point system correctly classified over 90%
of the failed firms two years prior to failure, but was only 60% accurate three years
prior. The Type II error rate was quite high, averaging well over 20% in each year.
Weinrich advocated the use of trend analysis of the point system as well as the point
estimate.
(c) Gebhardt (1980). Gebhardt (1980) compared dichotomous and multivariate
classification tests of samples of failed and nonfailed firms based on models con-
structed before and after the 1965 Financial Statement Reform Law. The earlier
model contained 13 matched pairs of industrial firms and the post-1965 model con-
tained 28 pairs. He utilized a very large number of possible financial indicators which
were reduced to 41 ratios for the dichotomous tests. He also incorporated crude
measures of misclassification costs and tested his results with the Lachenbruch
(1967) holdout test procedure. Gebhardt, like others, felt that the non-normality of
some ratios implied the use of nonparametric procedures but found those results un-
satisfactory. The multivariate results were far superior. Gebhardt concluded that the
pre-l965 models’ results were actually better than the ones following the reform law.
(d) Fischer (1981). Fischer’s work concentrates on non-numerical data for fore-
casting failure. He is particularly interested in methods of credit evaluation for sup-
pliers who do not have the ability or the data to perform comprehensive conventional
analysis on their existing and potential customers. He advocates an electronic data
processing system which can retrieve and analyze such non-numerical information as
reports from newspapers, magazines, inquiry agencies, and credit information from
other sellers. Unfortunately, according to Fischer, commercial rating agencies and
banks are constrained as to how honest and revealing they choose to be with regard
to their reports. In addition, the information provided may be outdated and certainly
contains subjective elements. More than one source of credit information is therefore
desirable.
Fischer advocates combining the permanent and transitory information on enter-
prises with microeconomic and sociopolitical data. Five arbitrary rating categories
10.4 GERMANY 10 • 9