Financial Ratios for Bankruptcy Prediction A Consensus Approach

Abstract

Bankruptcy prediction is essentially a judgemental task. Yet, most models use statistical methods to select the relevant financial variables for prediction. This study provides behavioural evidence from 31 bank managers and officers of financial institutions in Nigeria on the appropriateness of the choice of variables for bankruptcy prediction.

The study finds that there was a consensus on short‐term liquidity ratios being consistent predictors of financial distress, a finding which confirms the usual choice of these variables based on statistical models.

Interestingly, the short-term lending orientation of the financial institutions represented on the study appears to have yielded a consensus in the respondents' preference for the short-term liquidity ratios. The study finds that the level of experience of the manager has an important bearing on the choice of variables to be used in predicting bankruptcy.