Two Discriminant Analysis Models of Predicting Business Failure: A Contrast of the Most Recent with the First Model

Managers can use models for predicting business failures to assess an organization’s success or distress. Hundreds of such models have been constructed over last forty-five years. Altman’s (1968) paper is the oldest and Bhandari and Iyer‘s (2013) paper, here after Bhandari (2013) is the most recent. Although both used discriminant analysis technique on matched sample of failed and non-failed firms they differ in all other respects. Altman’s model by far is the most popular; it focused on publicly held manufacturing corporations, using balance sheet and income statement based ratios (none from cash flow statement) as explanatory variables. Bhandari’s sample firms belonged to more than 25 industries and used financial ratios based on all three financial statements. Altman explored 22 ratio variables to select five best and justified them post-facto. Bhandari on the other hand used seven a-prior logically justified explanatory variables. This paper compares, contrast and critiques these two models.