PREDICTING FINANCIAL DISTRESS OF PUBLIC COMPANIES LISTED IN AMMAN STOCK EXCHANGE

July edition PREDICTING FINANCIAL DISTRESS OF PUBLIC COMPANIES LISTED IN AMMAN STOCK EXCHANGE Alaa Al-Horani 0 1 0 Associate Professor at Amman University, Department of Finance and Banking 1 Hazem B . Al-khatib Associate Professor Amman University, Department of Finance and Banking This study investigates the role of a set of financial ratios in predicting financial distress of publicly listed companies in Jordan. Using Logistic Regression and Discriminant Analysis a comparison has been made between the two models to determine which is more appropriate to use as well as which of the financial ratios are statistically significant in predicting the financial distress of Jordanian companies. During the period 2007 to 2011, the results show that both logistic regression and discriminant analysis can predict financial distress, and that Return on Equity (ROE) and Return on Assets (ROA) are the most important two financial ratios, which help in predicting the financial distress of public companies listed in Amman stock Exchange. Financial Distress; Public Companies; Stock Exchange 2. Research Value and Objectives: 3. Research Hypotheses 4. Previous Research: 5. Sample, Data and Methodology This research is based on the study of Alrajaby (2006) and uses a similar methodology. Data used throughout the research is obtained from published annual reports of all publicly listed companies in Amman Stock Exchange that are traded on regular basis during the period 2007 to 6. Research Results DN = 0.69L10 + 0.62L19 + 0.57L13 + 0.51L6 where DN is a discriminatory number LN (P/ (1-P)) = 229.04 + 608.16 L6 2615.15L10 288.21L19 where P is the probability that a company is financially distressed to total assets and equity to total liabilities are the most statistically significant variable. Finally in the year 2011, pre- tax profit to total assets, ROE and fixed assets to equity are statistically significant in predicting financially distressed companies listed in Amman Stock Exchange. Table (7) Statistically Significant Financial Ratios Obtained from Discriminant Analysis and Logistic Regression and Their Frequency throughout Study Years 1 1 2 7. Conclusion and Recommendation of the Research financially distressed companies avoid financial distress by making corrective actions long before distress occurs. References: Al-Rajaby, M. (2006), Using Financial Ratios to Predict Failure of Jordanian Public Companies Using Discriminant and Logit Analysis, Arab Journal of Administrative Sciences, Kuwait University, 13, 149-173. Altman, E. (1968), Financial Ratios, Discriminate Analysis and the Prediction of Corporate Bankruptcy, Journal of Finance, 23, 589-609. Altman, E. (2002), Corporate Distress Prediction Model in a Turbulent Economic and Basel II Environment, Social Science Research Network NYU Working Paper No.FIN-02-052, 10-16. Altman, E. and G. Franco Varetto (1994), Corporate Distress Diagnosis: Comparison Using Linear Discriminant Analysis and Neural Network: (the Italian experience), Journal of Banking and Finance, 18, 505-529. Altman, E., Haldeman, G. and P. Narayanan (1977), Zeta Analysis: A New Model to Identify Bankruptcy Risk of Corporations, Journal of Banking and Finance, 1, 29-54. Charalambous, C., Neophytou, E., and A. Charitou (2004), Prediction of Corporate Failure: Empirical Evidence for the UK, European Accounting Review, 13: 465-497. Fulmer, J., Moon, J., Gavin T. and J. Erwin (1984), Bankruptcy Classification Model for Small Firms, Journal of Commercial Bank Lending, 66, 25-37. Ginoglou, D., and A Konstantinos (2002), Corporate Failure of Problematic Firms in. Greece with LPM, Logit, Probit and. Discriminant Analysis Models, Journal of Financial Management and Analysis,15, 1-15. Hindi, M. (1991), Predicting Technical Bankruptcy of Public-sector Companies in Egypt, The Scientific Magazine of Faculty of Economics, University of Qatar, 2, 59-125. Khamis, B. (1989), Using Financial Ratios to Predict High Successful and Low Successful Industrial Companies, Unpublished MPhil Thesis, University of Jordan, Amman, Jordan. Mensah, Y. (1983), The Differential Bankruptcy Predictive Ability of Specific Price Level Adjustments: Some Empirical Evidence, The Accounting Review, 58, 246-288. Sharma, S. and V. Mahagan (1980), Early Warning Indicators of Business Failure Journal of Marking, 44, 80-89. Zavgren , C. ( 1985 ), Assessing the Vulnerability to Failure of American Industrial Firms: A Logistic Analysis , Journal of Business Finance and Accounting , 12 , 19 - 45 . (...truncated)