Predicting financial distress using financial and non-financial variables

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Authors

Van der Colff, Francois
Vermaak, Frans N.S.

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Journal ISSN

Volume Title

Publisher

University of Johannesburg, Faculty of Economic and Financial Sciences

Abstract

This study attempts to clarify whether using a hybrid model based on non-financial variables and financial variables is able to provide a more accurate company financial distress prediction model than using a model based on financial variables only. The relationship between the model test results and the De la Rey K-Score for the subject companies is tested, employing Cramer’s V statistical test. A movement towards a Cramer’s V value of one indicates a strengthening relationship, and a movement towards zero is an indication of a weakening relationship. Against this background, further empirical research is proposed to prove that a model combining financial variables with true non-financial variables provides a more accurate company distress prediction than a financial variable-only model. The limited evidence of a strengthening relationship found is insufficient to establish the superiority of the proposed model beyond reasonable doubt.

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Keywords

Financial distress prediction, Non-financial variables, Financial distress continuum, Neural networks

Sustainable Development Goals

Citation

Van der Colff, F & Vermaak, F 2015, 'Predicting financial distress using financial and non-financial variables', Journal of Economic and Financial Sciences, vol. 8, no. 1, pp. 243-260.