Distress Classification of Korean Firms

Abstract

This study is an attempt to construct and test a distress classification model for Korean companies. Utilizing a sample of 34 distressed firms from the most recent 1990-1993 period and a matched (by industry and year) sample of non-failed firms, we observe the classification accuracy of two models. Both models utilize measures of firm size, asset turnover, solvency and leverage with one model available for testing only on publicly traded companies and one model is applicable to all public and private entities. We observe excellent classification accuracy based on data from the first two years prior to distress. And, although the accuracy drops off after t-2, the models still provide effective early warnings of distress in many cases. The results of this study are of particular relevance in the current financial market scenario of increased deregulation and greater individual financial institution decisions making.