Risk of Bankruptcy, Its Determinants and Models

Abstract

In this paper, the following research problem was addressed: Is DEA (Data Envelopment Analysis) method a suitable alternative to Altman model in predicting the risk of bankruptcy? Based on the above-mentioned research problem, we formulated the aim of the paper: To apply DEA method for predicting the risk of bankruptcy and to compare its results with the results of Altman model. The research problem and the aim of the paper follow the research of authors aimed at the application of methods which are appropriate for measuring business financial health, performance and competitiveness as well as for predicting the risk of bankruptcy. To address the problem, the following methods were applied: financial ratios, Altman model for private non-manufacturing firms and DEA method. When applying DEA method, we formulated input-oriented DEA CCR model. We found that DEA method is an appropriate alternative to Altman model in predicting the risk of possible business bankruptcy. The important conclusion is that DEA allows us to apply not only outputs but also inputs. Since prediction models do not include these indicators, DEA method appears to be the right choice. We recommend, especially for Slovak companies, to apply cost ratio when calculating risk of bankruptcy.