Most observers would agree that action to detect and avoid critical pressures of this
type is highly desirable in an economy like Brazil, which has enjoyed extraordinary
growth followed by severe inflation, maxi devaluations and recessions. And, as a re-
sult of the very recent significant reduction in inflation, banks are now making loans
again and are therefore concerned with credit risk issues. Based on the results in
1994–1996, these concerns are valid as the number of business failures escalated,
computed to the days of hyperinflation and little borrowing.
(a) Altman, Baidya, and Ribeiro-Dias (1979). Altman, Baidya, and Ribeiro-Dias
(1979) examined two a priorigroups of firms categorized as serious-problem (SP)
and no-problem (NP) companies. A small number of variables were then calculated
for each observation (firm) in each of the two samples. Data covered the period from
one to three annual reporting statements prior to the problem date. The data from one
year prior (and the corresponding year for the control sample) were then analyzed
through the use of linear discriminant analysis.
The serious-problem firms were defined as those filing formal petitions for court-
supervised liquidations, legal reorganizations in bankruptcy (concordatas), and out-
of-court manifestations of serious problems. In all but two of the 23 serious-problem
cases, the problem became manifest during the 30 months from January 1975 to June
- Industry categories represented include textiles, furniture, pulp and paper, re-
tail stores, plastics, metallurgy, and others. The average asset size of the serious-prob-
lem firms was surprisingly high at 323 million cruzeiros (U.S. $25–30 million).
Therefore, the model, if accurate, has relevance over a wide range of companies in
terms of size. The control (or no-problem) sample was actually somewhat smaller in
terms of average asset size.
One or two firms were selected for the control sample from each of the same in-
dustrial categories as those represented by the serious-problem group, and data were
gathered from the year corresponding to the year prior to the problem date. Since
there were more than 30 industrial categories to choose from, the number of firms in
each industrial group was often quite small. Whenever possible, privately owned, do-
mestic companies were selected since we felt that a state-owned or multinational af-
filiation reduced, in general, the possibility of failure.
The classification procedure used in this study is based on the failure model de-
veloped in the United States (Altman, 1968), with modifications that allow for con-
sideration of Brazilian standards and reporting practices. In this Brazilian study, the
same variables were utilized but X 2 and X 4 were modified. With respect to X 2 , the
retained earnings account on U.S. balance sheets reflects the cumulative profits of a
firm less any cash dividends paid out and stock dividends. In most instances, the
small, young firm will be discriminated against because it has not had time to accu-
mulate its earnings. In Brazil, however, due to different financial reporting practices
and adjustments for inflation, there is no exact equivalent to retained earnings. The
nearest translation to retained earnings is “lucros suspetisos,” which refers to those
earnings retained in the business after distribution of dividends, This amount is usu-
ally transferred, however, within a short time (perhaps two years) through stock div-
idends to the account known as capital.
In addition, reserves that were created to adjust for monetary correction on fixed
assets and the maintenance of working capital were deducted from profits and
thereby decrease those earnings which are reported to be retained in the firm. These
reserves, however, increase both the assets and the firm’s equity and they too are
10.14 BRAZIL 10 • 33