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Journal of International Financial Management and Accounting 11:3 2000

Bankruptcy Prediction: Evidence from

Korean Listed Companies during the
IMF Crisis

Joo-Ha Nam
Sogang University
Taehong Jinn
Hongik University

Abstract
This paper empirically studies the predictive model of business failure using the sample
of listed companies that went bankrupt during the period from 1997 to 1998 when deep
recession driven by the IMF crisis started in Korea. Logit maximum likelihood estimator
is employed as the statistical technique. The model demonstrated decent prediction accuracy
and robustness. The type I accuracy is 80.4 per cent and the Type II accuracy is 73.9 per
cent. The accuracy remains almost at the same level when the model is applied to an
independent holdout sample. In addition to building a bankruptcy prediction model this
paper finds that most of firms that went bankrupt during the Korean economic crisis from
1997 to 1998 had shown signs of financial distress long before the crisis. Bankruptcy
probabilities of the sample are consistently high during the period from 1991 to 1996. The
evidence of this paper can be seen as complementary to the perspective that traces Asian
economic crisis to the vulnerabilities of corporate governance of Asian countries.

1. Introduction
A large number of business failures in Korea since the bailout of the
economy by the IMF gave us an excellent opportunity for constructing
and testing a business failure prediction model. A lot of listed companies,
including chaebol firms that went bankrupt in the recent economic crisis,
can constitute a reliable data set for the study of a bankruptcy prediction
model. We try to take advantage of this opportunity. The study of business
failure and the ability to identify it early enough has never been more im-
portant since corporate financial distress is expected to increase with onset
of market principles in the Korean economy.
In addition to constructing and testing a specific model, this paper gives
a clue to figuring out what are the factors that caused the recent economic
crisis in Korea. Empirical results of this paper show that most of firms that
went bankrupt during the Korean economic crisis from 1997 to 1998 had
shown signs of financial distress long before the crisis. The evidence is in
© Blackwell Publishers Ltd. 2000, 108 Cowley Road, Oxford OX4 1JF, UK and 350 Main Street, Malden, MA 02148, USA.
 Bankruptcy Prediction 179

line with the view that the abnormal behavior of firms with respect to cor-
porate finance as well as macro economic factors should be considered in
explaining the Asian economic crisis. For example, Pomerleano (1998)
offers a financial distress perspective tracing the crisis to the characteristic
of corporate finance of Asian countries. He compares corporate financials
of Asian countries with those of other countries, such as industrialized
countries, and finds that excessive investment, excessive borrowing and
low profitability characterize corporate finance of such countries as Indonesia,
Korea and Thailand. He concludes that financial excesses of those Asian
countries led to financial distress and eventually to the crisis. Claessens
et al. (1998) also attribute the combination of high investment, low profit-
ability and high leverage of east Asian countries to the crisis.
The logit maximum likelihood estimator is used to construct and test a
business failure prediction model. We adopt the logit analysis since it does
not impose any distribution on the explanatory variable and it can directly
provide the probability of bankruptcy.1
There are a lot of bankruptcy prediction models using non-U.S. data
including Korea.2 Among a number of Korean studies on business fail-
ures, the most recent and relevant in relation to our study is Altman et al.
(1995). They built a bankruptcy prediction model employing 34 distressed
firms in the period from 1990 to 1993 and a matched sample. Variables
such as firm size, sales to assets, solvency and leverage are selected as
predictors of bankruptcy in the discriminant analysis. Even though their
models demonstrated good prediction accuracy in the first two years prior
to bankruptcy, due to the lack of data they were not tested on a complete
and meaningful holdout sample including a set of bankrupt firms independ-
ent of the original sample.
This paper is organized as follows. Section 2 briefly discusses the
methodology of the analysis. Section 3 describes data and presents em-
pirical results of the logit model. Section 4 concludes the paper.

2. The Methodology
Logit analysis, the statistical technique adopted in this paper, is used to
classify or make predictions in problems where a dependent variable ap-
pears in qualitative forms, e.g., male or female, bankrupt or non-bankrupt.
The logit prediction model of business failure is estimated by a maximum
likelihood estimator. This section briefly describes how the logit model is
applied to the prediction of bankruptcy.
© Blackwell Publishers Ltd. 2000.
180 Joo-Ha Nam and Taehong Jinn

The logit model assumes that there is an underlying response variable

Y*i defined by the regression relationship.

Y*i = β′xi + ui (1)

where

Yi bankrupt if Y*i . 0
Yi non-bankrupt, otherwise
xi financial ratios of firm
ui error term

The probability and likelihood function for the bankruptcy can be defined
as follows:

Prob(yi = 1) = Prob(ui . – β′xi) = 1 – F(– β′xi) (2)

where F is the cumulative distribution function for u.

L = C F(– β ′ xi ) C [1 – F(– β ′ xi )] (3)

yi = 0 yi = l

If the cumulative distribution of ui is logistic, then we have a logit model

of business failure. For the application of the prediction model, we
estimate the weights of financial ratios in equation (1) using financial
ratios of listed firms. Then the probability of bankruptcy can be calculated
from the cumulative probability function,

exp(– β′xi) 1
F(–β′xi) = = (4)
1 + exp(– β′xi) 1 + exp(β′xi)

Optimal β (weights) can be estimated where the likelihood value is

maximized. The probability of bankruptcy is obtained by substituting β
into the cumulative probability function. If the calculated probability from
the logit model is over 0.5, the firm is classified as bankrupt, otherwise as
non-bankrupt.
Discriminant analysis can also make bankruptcy predictions.3 The first
step of discriminant analysis is to estimate the discriminant function using
financial ratios of bankrupt and non-bankrupt firms. The Z-score and
cut-off point are computed. If the Z-score of a firm is less than the cut-off
point, the firm is classified as bankrupt. Discriminant analysis, however,
does not provide the probability of bankruptcy.
© Blackwell Publishers Ltd. 2000.
 Bankruptcy Prediction 181

3. Data and Empirical Results

3.1 Data
Our sample consists of 46 non-financial listed firms that went bankrupt in
1997 and 1998. Assets of the sample range from 39 billion won ($32.5
million) to 6945 billion won ($4.18 billion). The sample comes from a
variety of industries. Note that the vast majority of the sample had gone
bankrupt before the IMF regime started in December 1997. We con-
structed a matched sample of non-bankrupt listed firms. For each firm
in the sample of bankrupt firms we chose a non-bankrupt listed firm that
belongs to the same industry and has similar amount of asset. We didn’t
follow a kind of simulated selection technique in constructing matched
sample as utilized in Altman et al. (1995), since our matched sample is
matched in size as well as in industry. We think that matching of sample
in terms of size is very important in the study of business failures in Korea
because of the “too big to fail” problem prevalent in Korea. It should be
noted that none of the firms in the four biggest chaebols went bankrupt
during the IMF crisis.4 Table 1 of Appendix lists the names of the bank-
rupt firms, non-bankrupt firms and dates of bankruptcy. The construction
of the matched sample in this way will enhance the validity and reliability
of the analysis.5

3.2 Empirical Results

Variables we employed to give early warning of financial distress are mostly
traditional financial ratios that come from financial statements such as
balance sheets and income statements. Table 1 lists 33 variables that com-
prise candidates for final variables of the model. The 33 variables include
those measuring profitability, turnover, growth, productivity, fixed charge
coverage, solvency, leverage and liquidity.
Thirty-three financial ratios are calculated from financial statements for
the year 1996, which is one reporting period prior to bankruptcy for firms
bankrupt in 1997 and two reporting periods prior to bankruptcy for firms
bankrupt in 1998. Obviously it would produce a serious bias if ratios were
calculated one reporting period prior to bankruptcy for the whole sample.6
In order to get reliable results in the logit analysis, it is necessary to find
major explanatory financial ratios that can discriminate between the two
groups. According to t-test results in Table 2, 10 variables out of 33 are found
to be important to predict the bankruptcy of firms at the 5 per cent signifi-
cance level.7 Only those ratios whose t values are statistically significant
© Blackwell Publishers Ltd. 2000.
182 Joo-Ha Nam and Taehong Jinn

Table 1. List of Variables

Variable Number Variable Name

1 current ratio
2 quick ratio
3 fixed ratio
4 fixed assets/(stockholders equity + long-term liabilities)
5 debt ratio
6 stockholder’s equity/total assets
7 (total borrowings + bonds payable)/total assets
8 ordinary income/total assets
9 net income/total assets
10 net income/stockholder’s equity
11 reserve/stockholder’s equity
12 operating income/sales
13 ordinary income/sales
14 cost of sales/sales
15 financial expenses/sales
16 (income before income tax + financial expenses)/
financial expenses
17 (net income + depreciation + financial expenses)/
(total borrowings + bonds payable + financial expenses)
18 total assets turnover
19 stockholders’ equity turnover
20 working capital turnover
21 fixed assets turnover
22 property, plant and equipment turnover
23 inventory turnover
24 receivables turnover
25 payables turnover
26 growth rate of sales
27 growth rate of stockholder’s equity
29 growth rate of net income
30 gross value added/total assets
31 gross value added/machinery and equipment
32 gross value added/sales
33 employment costs/gross value added

at the 5 per cent confidence level are included. Since these variables are
chosen on the basis of a univariate t-test, multiple regression is required to
determine the relative contribution of each independent variable and to
evaluate correlations among independent variables.8
The stepwise procedure is applied to finalize the appropriate explanatory
variables to be used in the maximum likelihood estimate. Table 3 reports
the results of the stepwise method. Three variables out of 10, which
are var 15, var 17, and var 24, turn out to be significant as predictors of
© Blackwell Publishers Ltd. 2000.
 Bankruptcy Prediction 183

Table 2. T-test of Variables

Variables Bankrupt firms Non-bankrupt firms T-value Prob . |T|

Var1 123.94 162.32 –1.5680 0.1204

Var2 87.80 121.11 –1.4960 0.1382
Var3 230.78 268.64 –0.3562 0.7226
Var4 90.26 88.81 0.1631 0.8708
Var5 405.17 510.26 –0.3751 0.7085
Var6 25.33 32.04 –1.8511 0.0675
Var7* 53.84 42.94 3.0563 0.0030
Var8* –0.77 1.54 –2.4210 0.0175
Var9* –0.78 1.14 –2.3079 0.0233
Var10 –4.51 –25.32 0.7913 0.4309
Var11 38.92 28.79 0.2710 0.7871
Var12 6.92 5.95 0.7793 0.4378
Var13 –1.52 1.01 –1.6972 0.0931
Var14 78.89 80.93 –0.8082 0.4211
Var15* 11.10 6.73 4.4299 0.0000
Var16* 104.99 191.35 –2.5658 0.0119
Var17* 25.92 58.23 –2.9876 0.0036
Var18* 0.70 0.97 –3.7869 0.0003
Var19 3.59 4.77 –0.9251 0.3575
Var20 1.12 14.20 –0.9130 0.3637
Var21 1.93 2.22 –1.2041 0.2317
Var22 3.96 4.02 –0.0890 0.9292
Var23 7.18 10.63 –1.0298 0.3058
Var24* 4.39 7.03 –3.2909 0.0014
Var25* 8.28 13.12 –2.2454 0.0272
Var26 12.13 12.31 –0.0506 0.9598
Var27 23.96 21.30 0.4323 0.6666
Var28 149.22 9.98 0.9894 0.3252
Var29 –37.47 –3.79 –0.8604 0.3924
Var30* 17.34 21.20 –2.2098 0.0297
Var31 46.34 49.41 –0.6147 0.5403
Var32 25.70 23.80 0.9175 0.3613
Var33 55.07 36.64 0.9744 0.3325

*Indicates significance at the 5% level.

corporate bankruptcy. The score and p-value of the three ratios are
statistically significant. An overall significance test of the three variables
based on likelihood ratio is also done to confirm the significance of three
variables. Numbers in Table 4 confirm that the three variables are doing
the best overall job together as predictors of corporate bankruptcy.9
Average values in Table 2 can be interpreted as what we expect when
comparing distressed firms to normal ones. In terms of the three variables
that comprise the final model, distressed firms have less profits for paying
© Blackwell Publishers Ltd. 2000.
184 Joo-Ha Nam and Taehong Jinn

Table 3. Summary of Stepwise Procedure

Variable Score (χ-square) Pr . χ-square

VAR15 15.0081 0.0001

VAR17 3.0621 0.0801
VAR24 7.4469 0.0064

Table 4. Joint Significance Tests of Stepwise Procedure

Criterion Without Covariates With Covariates χ-square

AIC* 127.539 107.616
SC** 127.539 115.181
–2LogL 127.539 101.616 25.923 with 3 DF (p = 0.0001)

*Akaike Information Criterion

**Schwartz Criterion

Table 5. Comparison of Models

Sample Analysis
Model Methodology Size Period Key Variables

Altman et al. MDA 34 1990–1993 Size

(1995) Asset turnover
Solvency*
Leverage
Our model Logit Analysis 46 1997–1998 Financial expenses
to sales
Debt coverage**
Receivables turnover

*retained earnings to total asset

**(net income + depreciation + financial expenses )/(total borrowings + bonds payables + financial
expenses)

debts, are paying more interest expenses and turnover receivables less fre-
quently. Focusing on two out of three variables in the model, a prominent
characteristic of bankrupt firms in our sample seems to be the difficulty of
servicing short-term debts and the burden of interest expenses before the
IMF crisis. Comparing variables in our model with those in the model of
Altman et al. (1995), one can not find a big difference. Except for a size
variable which seems to be included in the model because matched sample
is not matched in size, key variables in the model are asset turnover, retained
© Blackwell Publishers Ltd. 2000.
 Bankruptcy Prediction 185

Table 6. Analysis of Maximum Likelihood Estimates

Variable Parameter Estimates Standard Error χ-square Pr . χ-square

VAR15 0.1061 0.0254 17.4715 0.0001

VAR17 –0.00658 0.0037 3.1604 0.0754
VAR24 –0.1186 0.0420 7.9543 0.0048

Table 7. Association of Predicted Probabilities and Observed Responses Within

Sample

Predicted

Bankrupt Non-bankrupt Total

Observed Bankrupt 37(80.4%) 9(19.6%) 46(100%)

Non-bankrupt 12(26.1%) 34(73.9%) 46(100%)

earning to total asset and leverage. Given that both asset turnover and
receivables turnover represent the activity of firms, the major difference
between two models is that more specific variables representing current
ability of firms’ servicing short-term debts and the burden of interest ex-
penses are included in our model while Altman et al. (1995) include variables
representing cumulative profitability and leverage. Table 5 presents a
comparison between our model and Altman et al. (1995).
We obtain maximum likelihood estimates of the three variables. Table 6
shows the results.
The results show that the three variables have a high degree of ex-
planatory power in identifying financially solvent/insolvent firms. Table 7
shows the prediction accuracy of the model, within-sample. The accuracy
in predicting a financially sound firm is 73.9 per cent. The accuracy in
predicting a financially insolvent firm is 80.4 per cent.
The final step to complete the study is the validation of the prediction
model using an independent holdout sample. The prediction model is
applied to an independent sample of 27 listed firms bankrupt in 1997 and
1998 and 23 non-bankrupt firms to test the validity of the model.10 Note
that unlike Altman et al. (1995), who validated the model using a holdout
sample of non-bankrupt firms, we constructed an independent holdout
sample that consists of bankrupt firms as well as non-bankrupt firms.
Table 2 in the Appendix lists names of firms in the holdout sample. Table 8
shows that 20 out of 27(74.07%) bankrupt firms and 17 out of 23(78.26
© Blackwell Publishers Ltd. 2000.
186 Joo-Ha Nam and Taehong Jinn

Table 8. Prediction Accuracy of the Model Using a Holdout Sample

Predicted

Bankrupt Non-bankrupt Total

Observed Bankrupt 20(74.07%) 7(25.93%) 27(100%)

Non-bankrupt 6(21.74%) 17(78.26%) 23(100%)

per cent) non-bankrupt firms are accurately predicted. Even though the
prediction accuracy is not very high, the prediction model is robust in that
accuracy using the holdout sample is not greatly different from that of the
original sample.
One of the interesting questions in relation to the validation of the
model is how the model predicts the bankruptcy of Daewoo which had
been one of five biggest chaebols in Korea until it went bankrupt in 1999.
Neither the original sample nor the holdout sample includes any of listed
firms which belong to Daewoo since it went bankrupt in 1999, not in 1997
or 1998. The model is applied to listed firms of Daewoo which are under
the workout process after the default in 1999. Table 4 in the Appendix
shows bankruptcy probabilities of the listed firms based on data from
1991 to 1996. As it turns out, the model predicts none of the firms as
bankrupt.11

Applying the logit model

In order to predict the probability of failure of a firm by utilizing the logit
model, one needs only to come up with a reduced version of the logit
model as outlined in Table 6. Thus, it is possible to predict the bankruptcy
risk of the firm by simply substituting the three variables of the firm—
Var 15, Var 17 and Var 24—into the following Logit model:

E(Logit) = 0.1062 *VAR15 – 0.00682 *VAR17 – 0.1139*VAR24

e(–E(Logit)) 1
P= (–E(Logit))
=
1+e 1 + eE(Logit)
For example, suppose that values of three variables of a firm are given as
follows.

Var15 = 3.99. Var17 = 84.99. Var24 = 12.54.

© Blackwell Publishers Ltd. 2000.
 Bankruptcy Prediction 187

E(logit) and P are calculated as follows.

E(logit) = 0.1062 *3.99 + (–0.00682) + (–0.1139*12.54) = –1.5842.

e(–E(Logit)) 1
P= (–E(Logit))
= = 0.8297.
1+e 1 + eE(Logit)

Longer Term Accuracy

Table 9 shows bankruptcy probabilities of the original sample and the
accuracy of bankruptcy prediction based on data from financial statements

Table 9. Bankruptcy Probabilities of the Sample from 1991 to 1996

Bankruptcy Probabilities

Firm Number 1991 1992 1993 1994 1995 1996

1 0.6141 0.6935 0.6969 0.7420 0.7507 0.7983

2 0.5716 0.6223 0.6193 0.5706 0.6253 0.5660
3 0.5230 0.5293 0.5396 0.5087 0.4749 0.4698
4 0.5019 0.4953 0.5225 0.5523 0.5203 0.5093
5 0.6233 0.7601 0.7679 0.6720 0.7229 0.8415
6 0.5740 0.6451 0.6592 0.6068 0.6352 0.7425
7 0.5132 0.5359 0.5409 0.4991 0.4539 0.4667
8 0.5370 0.6549 0.6394 0.7024 0.6892 0.6828
9 0.6018 0.7335 0.7239 0.7024 0.7438 0.8196
10 0.5362 0.5992 0.6172 0.6814 0.6538 0.7145
11 0.5792 0.5714 0.5371 0.4365 0.4439 0.4260
12 0.5186 0.5384 0.5842 0.7111 0.8018 0.8254
13 0.4665 0.4714 0.5000 0.5641 0.5547 0.6133
14 0.5495 0.5937 0.6129 0.7070 0.7971 0.7982
15 0.6715 0.8127 0.7784 0.7589 0.6983 0.6389
16 0.5473 0.7198 0.6918 0.7446 0.6993 0.8087
17 0.4842 0.4716 0.4367 0.4191 0.4051
18 0.5196 0.5829 0.6054 0.6162 0.6640 0.6521
19 0.5182 0.6072 0.5783 0.5744 0.6406 0.6742
20 0.5318 0.5856 0.5309 0.5539 0.5974 0.6447
21 0.4880 0.5247 0.6061 0.6559 0.6993 0.6799
22 0.4958 0.4688 0.5348 0.4998 0.5894 0.7224
23 0.5072 0.5145 0.4982 0.4883 0.5080 0.5161
24 0.5349 0.5472 0.5035 0.5185 0.5313 0.5358
25 0.4865 0.4975 0.5184 0.4756 0.5686 0.6593
26 0.5885 0.6598 0.5652 0.5737 0.6944 0.8701
27 0.5946 0.6169 0.6176 0.6063 0.6563 0.6471
28 0.5407 0.6020 0.5677 0.5947 0.5858 0.5669
29 0.6497 0.7185 0.7175 0.8018 0.6420 0.6382
© Blackwell Publishers Ltd. 2000.
188 Joo-Ha Nam and Taehong Jinn

Table 9. Continued

Bankruptcy Probabilities

Firm Number 1991 1992 1993 1994 1995 1996

30 0.4597 0.5142 0.4299 0.5329 0.4478 0.4341

31 0.4854 0.5190 0.5079 0.5332 0.5031 0.4731
32 0.5183 0.5666 0.5927 0.6186 0.6659 0.6854
33 0.5282 0.5292 0.5322 0.5518 0.5413 0.5194
34 0.5436 0.5515 0.5502 0.4876 0.4388 0.4114
35 0.7584 0.5892 0.5255 0.2755 0.3162 0.6644
36 0.6138 0.6045 0.5684 0.4399 0.4202 0.5331
37 0.4395 0.4982 0.4081 0.4175 0.4456 0.6224
38 0.3456 0.4817 0.5090 0.5242 0.3659 0.3025
39 0.4455 0.4636 0.4967 0.5266 0.5586 0.4847
40 0.5157 0.6153 0.5744 0.5832 0.5933 0.5653
41 0.5833 0.6393 0.6167 0.5393 0.5918 0.5316
42 0.5148 0.5490 0.5679 0.5527 0.5601 0.6024
43 0.5263 0.5630 0.6087 0.6954 0.6524 0.6825
44 0.5465 0.5759 0.5783 0.5795 0.5873 0.6288
45 0.5034 0.5389 0.5409 0.5790 0.5876 0.6622
46 0.3709 0.2388 0.3579 0.3160 0.2562 0.6344
Number of 35 37 40 35 35 37
firms predicted (77.8%) (80.4%) (87.0%) (76.1%) (76.1%) (80.4%)
as bankruptcy

of 1991–96 using the prediction model constructed above. Note that, un-
like other studies including Altman et al. (1995), the predictive accuracy
of our model does not diminish abruptly as the time prior to bankruptcy
increases. While the Type I accuracy in 1995 and 1994 is slightly lower
than that of 1996, it rebounds in 1993 and 1992 to the level of 1996.12 This
seems to confirm the robustness of the model identified in the analysis
using a holdout sample. It is also worthwhile to note that bankruptcy prob-
abilities of the sample are consistently high during the period from 1991
to 1996. In addition to building a robust bankruptcy prediction model a
purpose of this study is to find out implications for explaining causes of
Korean economic crisis of 1997 and 1998. We think that the results in
Table 10 have some implications. Numbers in Table 9 say that most of the
listed Korean firms bankrupt firms in the crisis had shown high probabilities
of bankruptcy long before the crisis. The evidence is in line with findings
of Claessens et al. (1998) that the vulnerabilities in corporate finance of
east Asian countries, a factor triggering the crisis, already prevailed in early
© Blackwell Publishers Ltd. 2000.
 Bankruptcy Prediction 189

1990s. This result can be interpreted as implying that Korean economic

crisis of 1997 and 1998 was not just a temporary foreign exchange crisis
caused by macroeconomic factors but also a result from poor performance
of Korean firms as manifested in low profitability and high debt ratio over
a long period.

4. Conclusions
This paper empirically studies the predictive model of business failure
using the sample of listed companies that went bankrupt during the period
from 1997 to 1998 when a deep recession, driven by IMF sanctions, started
in Korea. One of merits of this paper is that a bankruptcy prediction model
is constructed based on the sample of listed companies on which a more
relevant set of data is available. Logit maximum likelihood estimator is
employed as the statistical technique.
Measures of firms’ ability of servicing short-term debts, interest expenses
to sales and account receivables turnover ratio are variables that comprise
the prediction model. The model demonstrated decent prediction accuracy
and robustness. The type I accuracy is 80.4 per cent and the Type II
accuracy is 73.9 per cent. The prediction accuracy remains almost at the
same level when the model is applied to an independent holdout sample.
Also the application of the model based on data from 1991 to 1996 shows
that the prediction accuracy remains consistent as the time prior to bank-
ruptcy increases.
In addition to building a bankruptcy prediction model, this paper shows
that most of firms that went bankrupt during the economic crisis from
1997 to 1998 had shown signs of financial distress long before the crisis.
Bankruptcy probabilities of the sample are consistently high during the
period from 1991 to 1996. The results can be interpreted as implying that
the crisis of 1997 and 1998 was not just a temporary foreign exchange
crisis but also a result from poor performance of Korean firms over a long
period. Aside from explaining just the Korean situation, the evidence of
this paper can be seen as complementary to the perspective that traces Asian
economic crisis to the characteristics of corporate governance of Asian
countries.

Notes
1. One of the earlier works on the business failure prediction model employing logit
analysis is Ohlson (1980).
© Blackwell Publishers Ltd. 2000.
190 Joo-Ha Nam and Taehong Jinn

2. Altman (1993) reviewed most of non-US studies on bankruptcy prediction.

3. See Altman (1968) for the detailed discussion of discriminant analysis and procedure
used to predict corporate bankruptcy.
4. Daewoo, which had been one of five biggest chaebols in Korea, went bankrupt in
1999.
5. If the matched sample consists mostly of big firms without matching in size, the
prediction accuracy of the model will be overstated due to the sample bias.
6. The reason is that the economy-wide systematic risk that affects business failures
can be different in different years.
7. The results of the t-test in Table 3 also considered heteroskadasticity of variances
between the two groups.
8. Table 3 in the appendix shows correlations between 33 financial ratios.
9. –2logL, a likelihood ratio, is distributed as χ2 under the null hypothesis that coeffi-
cients of all three variables are equal to 0. P-value of 0.0001 confirms overall significance
of the three variables in the prediction model.
10. Non-bankrupt firms consists of 23 firms of which bond credit ratings by Korea
Investors Service were higher than BBB in 1998.
11. Strictly speaking, our model can not calculate the bankruptcy probability of the
Daewoo group. Another prediction model, which can incorporate interdependency of firms
in a chaebol through cross loan guarantee and cross shareholdings, is necessary for a more
accurate calculation of bankruptcy probabilities of chaebols. Building of such a model is
one of future research topics.
12. Table 9 also shows that bankruptcy probability of the sample as a whole in 1996
increases from 1995. Bankruptcy probabilities of 24 firms are higher in 1996 versus 1995.
Bankruptcy probabilities of 9 firms remain almost unchanged in 1996 versus 1995.

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and Banking (November 1970), pp. 435–445.
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 Bankruptcy Prediction 191

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(Worldbank Policy Research Working Paper 1990, 1998).
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Appendix
Table A1. List of the Sample

Asset Bankruptcy Asset

Non-bankrupt Firm Size* Bankrupt Firm Date Size*

Namyang Dairy Products 202 Jinro General Foods 97.9.9 170

Daerim 176 Samlip General Foods 97.5.16 221
Kirin 84 Haitai Confectionery 97.11.3 1154
Korean Ginseng Products 83 Chunkwang Industrial 97.12.12 69
Oriental Brewery 202 Jinro 97.9.9 1326
HITE Brewery 1496 Woosung Food 97.10.8 186
Kyungbang 244 Ssangbangwool 97.10.16 88
Kumkang Trading 205 Yusung 97.5.8 88
Korea Polymer 36 Kyungnam Wool Textile 97.12.10 203
Ilkyung Traging 122 Boohung 97.11.28 126
Samyang Tongsang 120 Keumkang Leather 97.6.30 49
Isu Chemical 256 Samsung pharmaceutical 97.12.12 126
Dongsin pharmaceutical 88 Shinpoong pharmaceutical 97.12.17 86
Ildong pharmaceutical 131 Yungin Pharm Ind 97.12.8 243
Keumkang 709 Halla Cement 97.12.8 966
Dongbu Steel 1192 Sammi Steel 97.3.20 1534
Pusan Steel Mill 70 Samsun Industrial 97.4.8 73
Daelim Trading 96 Chefline 97.12.4 63
Samick Ind 57 Hyundai Metal 97.11.21 148
Samhwa Crown & Closure 102 Sannaedul Insu 97.12.15 130
Doosan Machinery 239 Soosan Heavy Industries 97.11.26 252
Whacheon Machinery 78 Taesung Machinery 97.6.30 7
Works & Structure 8
Trigem Computer 497 Newmax 97.11.10 187
Korea Computer 173 Taeil Media 97.11.10 503
Sindo Rico 327 Hexxim Teletek 97.11.19 201
Bukdoo 22 Dongkook Electronics 97.3.21 57
Jaeil Engineering 97 Haitai Electronics 97.11.3 812
Hankook Core 122 EZ Tech 97.12.15 54
Heesung Cable 223 Jinro Industries 97.9.9 211
Saehan Precision 69 Daebung Electric Wire 97.12.23 37
Hyundai Motors 7998 Kia Motors 97.9.23 6945
Hyundai Precision Ind. 2338 Asia Motors 97.9.23 2683
Hyundai Livart 368 Baroque Furniture 97.10.21 136
Hansung Enterprise 165 Samyang Foods 98.2.2 279
Sanglim Leather 53 Shinwha 98.1.9 87
© Blackwell Publishers Ltd. 2000.
192 Joo-Ha Nam and Taehong Jinn

Table A1. Continued

Asset Bankruptcy Asset

Non-bankrupt Firm Size* Bankrupt Firm Date Size*

Chokwang Leather 105 TaeHeung Leather 98.1.9 98

Samseong Publishing 43 Kemong Publishing 98.1.23 94
Shin Won JMC Corporation 38 Chinyang 98.1.12 149
Pacific Industries 90 Samkwang Glass Ind 98.2.10 81
Taeyang Metal Industrial 171 Kumkang Industrial 98.1.6 195
Iljin Electric 80 Shinkwang Enterprise 98.1.7 76
Kumkyung 159 Midopa 98.1.15 746
Aluminium of Korea 619 Sammi Corporation 97.3.20 619
Daesung Industrial 272 Sukwang 98.2.7 283
Hwasung Industrial 272 Hanjoo Corporation 97.8.19 170
Heunga Shipping 246 Seyang Shipping 97.11.1 64

* As of the end of 1996, 10 billion won.

Table A2. Lists of the Holdout Sample

Bankrupt Firms Bankruptcy Date Non-bankrupt Firms

Korea Tungsten 1998.5.13 Pohang Iron & Steel

Crown Confectionery 1998.1.15 LG Electronics
Dae Sun Distilling 1997.12.1 Hyundai Heavy Industries
Dae-Han Wool Textile 1998.6.10 Samsung Electronics
Young Jin Tech. 1998.6.5 Han Kook Tire MFG.
Hyosung Motors & Machinery 1997.12.19 Samsung Display Devices
Dong-Sung 1997.12.19 Hanil Cement MFG.
Hanil Synthetic Fiber 1998.6.19 Hyundai Electronics Ind.
Shinho Electronic & Communication 1998.5.5 Il Jin Corporation
Tae Chang 1998.4.30 Korea Green Cross Corporation
Korea Moolsan 1997.12.29 Samsung Electro-Mechanics
Nasan 1998.1.14 LG Industrial Systems
Choil Paper 1998.3.29 Kang Won Industries
Dong Hae Pulp 1998.4.13 Medison
Monalisa 1998.5.21 Union
Keo Pyung 1998.5.12 Hankuk Paper MFG.
Dooray Air Metal 1998.4.10 Daihan Paint & Ink
Kia Precision Works 1998.3.24 Samsung Heavy Industries
Tongil Heavy Industries 1998.3.9 Song-Won Ind.
Kia Special Steel 1997.11.4 Kolong Ind.
Kyong Hyang Construction 1998.5.12 Tae Lim Packaging Ind.
Kuk Dong Engineering & Construction 1998.1.16 Hyundai Elevator
SeoKwang Construction 1997.12.19
Chung Gu Housing & Construction 1997.12.26
Halla Engineering & Construction 1997.12.4
Kukje Corporation 1998.6.8
Haitai Stores 1997.11.1

© Blackwell Publishers Ltd. 2000.

Table A3. Correlations Between 33 Variables

VAR1 VAR2 VAR3 VAR4 VAR5 VAR6 VAR7 VAR8 VAR9 VAR10 VAR11

VAR1 1.00 0.98 –0.17 –0.50 –0.12 0.55 –0.32 0.41 0.40 0.12 0.09
VAR2 0.98 1.00 –0.14 –0.46 –0.10 0.53 –0.33 0.41 0.40 0.11 0.08
VAR3 –0.17 –0.14 1.00 0.31 0.98 –0.34 0.28 –0.27 –0.23 –0.70 –0.93
VAR4 –0.50 –0.46 0.31 1.00 0.19 –0.55 0.29 –0.50 –0.26 –0.31 –0.12
VAR5 –0.12 –0.10 0.98 0.19 1.00 –0.35 0.33 –0.26 –0.20 –0.71 –0.96
VAR6 0.55 0.53 –0.34 –0.55 –0.35 1.00 –0.72 0.60 0.37 0.30 0.27
VAR7 –0.32 –0.33 0.28 0.29 0.33 –0.72 1.00 –0.62 –0.40 –0.34 –0.26
VAR8 0.41 0.41 –0.27 –0.50 –0.26 0.60 –0.62 1.00 0.55 0.41 0.21
VAR9 0.40 0.40 –0.23 –0.26 –0.20 0.37 –0.40 0.55 1.00 0.57 0.31
VAR10 0.12 0.11 –0.70 –0.31 –0.71 0.30 –0.34 0.41 0.57 1.00 0.81
VAR11 0.09 0.08 –0.93 –0.12 –0.96 0.27 –0.26 0.21 0.31 0.81 1.00
VAR12 0.19 0.19 –0.09 –0.10 –0.08 0.06 0.05 0.23 0.52 0.31 0.11
VAR13 0.37 0.38 –0.15 –0.22 –0.11 0.29 –0.29 0.50 0.90 0.51 0.19
VAR14 –0.06 –0.09 0.03 0.09 0.06 –0.10 0.01 –0.11 –0.26 –0.25 –0.13
VAR15 –0.23 –0.22 0.08 0.14 0.03 –0.29 0.45 –0.38 –0.57 –0.21 –0.05
VAR16 0.60 0.61 –0.14 –0.21 –0.13 0.50 –0.47 0.57 0.70 0.19 0.14
VAR17 0.82 0.84 –0.11 –0.22 –0.10 0.42 –0.43 0.47 0.49 0.13 0.11
VAR18 –0.07 –0.06 0.02 –0.06 0.06 0.01 –0.22 0.28 0.27 0.08 –0.06
VAR19 –0.22 –0.19 0.74 0.33 0.76 –0.44 0.41 –0.42 –0.50 –0.82 –0.80
VAR20 –0.02 –0.02 –0.16 0.00 –0.17 0.06 –0.10 –0.03 –0.04 0.03 0.15
VAR21 0.05 0.03 0.01 –0.20 0.07 0.03 –0.01 0.24 0.14 0.12 –0.12
VAR22 0.27 0.25 –0.03 –0.33 0.04 0.12 –0.02 0.23 0.18 0.10 –0.09
VAR23 –0.08 –0.03 0.08 0.07 0.04 –0.28 –0.27 0.05 0.02 0.03 0.06
VAR24 0.06 0.03 –0.11 –0.08 –0.11 0.21 –0.26 0.18 0.14 0.07 0.10
VAR25 0.19 0.16 –0.06 –0.16 –0.04 0.25 –0.12 0.21 0.22 0.07 0.01
VAR26 0.00 0.00 –0.03 –0.14 –0.03 0.00 –0.01 0.13 0.38 0.20 0.09
VAR27 0.15 0.16 –0.14 –0.05 –0.12 0.09 –0.17 0.14 0.23 0.14 0.14
VAR28 –0.05 –0.04 –0.02 0.11 –0.02 –0.03 0.01 –0.22 –0.05 –0.18 –0.07
Table A3. Continued

VAR1 VAR2 VAR3 VAR4 VAR5 VAR6 VAR7 VAR8 VAR9 VAR10 VAR11

VAR29 0.10 0.11 0.05 0.11 0.06 –0.09 –0.01 0.12 0.47 0.07 –0.01
VAR30 –0.02 0.00 –0.07 –0.08 –0.07 0.07 –0.19 0.34 0.47 0.30 0.14
VAR31 0.10 0.10 –0.09 –0.21 –0.05 0.06 0.00 0.32 0.40 0.27 0.07
VAR32 0.02 0.04 –0.07 –0.05 –0.11 0.05 0.00 0.13 0.26 0.32 0.20
VAR33 0.08 0.06 0.04 –0.29 0.04 0.20 –0.26 0.34 0.27 0.94 –0.11

VAR12 VAR13 VAR14 VAR15 VAR16 VAR17 VAR18 VAR19 VAR20 VAR21 VAR22

VAR1 0.19 0.37 –0.06 –0.23 0.60 0.82 –0.07 –0.22 –0.02 0.05 0.27
VAR2 0.19 0.38 –0.09 –0.22 0.61 0.84 –0.06 –0.19 –0.02 0.03 0.25
VAR3 –0.09 –0.15 0.03 0.08 –0.14 –0.11 0.02 0.74 –0.16 0.01 –0.03
VAR4 –0.10 –0.22 0.09 0.14 –0.21 –0.22 –0.06 0.33 0.00 –0.20 –0.33
VAR5 –0.08 –0.11 0.06 0.03 –0.13 –0.10 0.06 0.76 –0.17 0.07 0.04
VAR6 0.06 0.29 –0.10 –0.29 0.50 0.42 0.01 –0.44 0.06 0.03 0.12
VAR7 0.05 –0.29 0.01 0.45 –0.47 –0.43 –0.22 0.41 –0.10 –0.01 –0.02
VAR8 0.23 0.50 –0.11 –0.38 0.57 0.47 0.28 –0.42 –0.03 0.24 0.23
VAR9 0.52 0.90 –0.26 –0.57 0.70 0.49 0.27 –0.50 –0.04 0.14 0.18
VAR10 0.31 0.51 –0.25 –0.21 0.19 0.13 0.08 –0.82 0.03 0.12 0.10
VAR11 0.11 0.19 –0.13 –0.05 0.14 0.11 –0.06 –0.80 0.15 –0.12 –0.09
VAR12 1.00 0.66 –0.66 0.03 0.27 0.21 –0.13 –0.28 –0.10 0.02 0.04
VAR13 0.66 1.00 –0.32 –0.56 0.56 0.47 0.22 –0.41 –0.03 0.12 0.18
VAR14 –0.66 –0.32 1.00 –0.21 –0.12 –0.06 0.26 0.27 0.09 0.14 0.12
VAR15 0.03 –0.56 –0.21 1.00 –0.44 –0.36 –0.64 0.06 –0.06 –0.32 –0.19
VAR16 0.27 0.56 –0.12 –0.44 1.00 0.64 0.18 –0.21 –0.04 0.02 0.11
VAR17 0.21 0.47 –0.06 –0.36 0.64 1.00 0.11 –0.17 –0.04 0.02 0.16
VAR18 –0.13 0.22 0.26 –0.64 0.18 0.11 1.00 0.21 –0.02 0.74 0.36
VAR19 –0.28 –0.41 0.27 0.06 –0.21 –0.17 0.21 1.00 –0.14 0.13 0.01
VAR20 –0.10 –0.03 0.09 –0.06 –0.04 –0.04 –0.02 –0.14 1.00 –0.07 –0.06
VAR21 0.02 0.12 0.14 –0.32 0.11 0.02 0.74 0.13 –0.07 1.00 0.70
Table A3. Continued

VAR12 VAR13 VAR14 VAR15 VAR16 VAR17 VAR18 VAR19 VAR20 VAR21 VAR22

VAR22 0.04 0.18 0.12 –0.19 0.11 0.16 0.36 0.01 –0.06 0.70 1.00
VAR23 –0.17 –0.03 0.14 –0.13 0.00 0.12 0.23 0.05 –0.04 –0.05 –0.11
VAR24 –0.28 0.05 0.42 –0.33 0.14 0.11 0.37 –0.05 –0.05 0.16 –0.02
VAR25 0.04 0.13 0.07 –0.20 0.26 0.11 0.27 –0.08 0.00 0.32 0.13
VAR26 0.18 0.40 0.03 –0.22 0.12 0.05 0.12 –0.09 –0.13 0.08 0.29
VAR27 –0.02 0.11 0.16 –0.04 0.25 0.10 –0.21 –0.23 –0.08 –0.17 –0.02
VAR28 0.00 –0.03 0.05 0.04 –0.02 –0.03 0.03 0.45 –0.09 0.03 –0.01
VAR29 0.30 0.41 0.00 –0.13 0.26 0.11 –0.08 –0.09 –0.02 –0.02 0.07
VAR30 0.28 0.39 –0.29 –0.41 0.30 0.17 0.51 –0.11 0.09 0.26 0.03
VAR31 0.43 0.35 –0.40 –0.22 0.25 0.12 0.40 –0.11 –0.01 0.61 0.38
VAR32 0.46 0.21 –0.62 0.21 0.11 0.05 –0.40 –0.38 0.12 –0.41 –0.33
VAR33 0.09 0.23 –0.14 –0.13 0.08 0.05 0.06 –0.71 0.02 0.11 0.08

VAR23 VAR24 VAR25 VAR26 VAR27 VAR28 VAR29 VAR30 VAR31 VAR32 VAR33

VAR1 –0.08 0.06 0.19 0.00 0.15 –0.05 0.10 –0.02 0.10 0.02 0.08
VAR2 –0.03 0.03 0.16 0.00 0.16 –0.04 0.11 0.00 0.10 0.04 0.06
VAR3 0.08 –0.11 –0.06 –0.03 –0.14 –0.02 0.05 –0.07 –0.09 –0.07 0.04
VAR4 0.07 –0.08 –0.16 –0.14 –0.05 0.11 0.11 –0.08 –0.21 –0.05 –0.29
VAR5 0.04 –0.11 –0.04 –0.03 –0.12 –0.02 0.06 –0.07 –0.05 –0.11 0.04
VAR6 –0.28 0.21 0.25 0.00 0.09 –0.03 –0.09 0.07 0.06 0.05 0.20
VAR7 –0.27 –0.26 –0.12 –0.01 –0.17 0.01 –0.01 –0.19 0.00 0.00 –0.26
VAR8 0.05 0.18 0.21 0.13 0.14 –0.22 0.12 0.34 0.32 0.13 0.34
VAR9 0.02 0.14 0.22 0.38 0.23 –0.05 0.47 0.47 0.40 0.26 0.27
VAR10 0.03 0.07 0.07 0.20 0.14 –0.18 0.07 0.30 0.27 0.32 0.94
VAR11 0.06 0.10 0.01 0.09 0.14 –0.07 –0.01 0.14 0.07 0.20 –0.11
VAR12 –0.17 –0.28 0.04 0.18 –0.02 0.00 0.30 0.28 0.43 0.46 0.09
VAR13 –0.03 0.05 0.13 0.40 0.11 –0.03 0.41 0.39 0.35 0.21 0.23
VAR14 0.14 0.42 0.07 0.03 0.16 0.05 0.00 –0.29 –0.40 –0.62 –0.14
VAR15 –0.13 –0.33 –0.20 –0.22 –0.04 0.04 –0.13 –0.41 –0.22 0.21 –0.13
Table A3. Continued

VAR23 VAR24 VAR25 VAR26 VAR27 VAR28 VAR29 VAR30 VAR31 VAR32 VAR33
VAR16 0.00 0.14 0.26 0.12 0.25 –0.02 0.26 0.30 0.25 0.11 0.08
VAR17 0.12 0.11 0.11 0.05 0.10 –0.03 0.11 0.17 0.12 0.05 0.05
VAR18 0.23 0.37 0.27 0.12 –0.21 0.03 –0.08 0.51 0.40 –0.40 0.06
VAR19 0.05 –0.05 –0.08 –0.09 –0.23 0.45 –0.09 –0.11 –0.11 –0.38 –0.71
VAR20 –0.04 –0.05 0.00 –0.13 –0.08 –0.09 –0.02 0.09 –0.01 0.12 0.02
VAR21 –0.05 0.16 0.32 0.08 –0.17 0.03 –0.02 0.26 0.61 –0.41 0.11
VAR22 –0.11 –0.02 0.13 0.29 –0.02 –0.01 0.07 0.03 0.38 –0.33 0.08
VAR23 1.00 0.021 0.05 0.04 0.17 –0.02 0.00 0.11 –0.10 –0.07 0.03
VAR24 0.21 1.00 0.36 0.08 0.12 –0.04 0.00 0.02 –0.13 –0.31 0.07
VAR25 0.05 0.36 1.00 0.00 0.12 –0.03 0.19 0.12 0.18 –0.08 0.04
VAR26 0.04 0.08 0.00 1.00 0.36 0.22 0.40 0.10 0.10 0.05 0.05
VAR27 0.17 0.12 0.12 0.36 1.00 0.08 0.42 –0.20 –0.15 0.00 0.07
VAR28 –0.02 –0.04 –0.03 0.22 0.08 1.00 0.00 –0.02 0.00 –0.07 –0.03
VAR29 0.00 0.00 0.19 0.40 0.42 0.00 1.00 0.08 0.10 0.21 –0.05
VAR30 0.11 0.02 0.12 0.10 –0.20 –0.02 0.08 1.00 0.74 0.52 0.19
VAR31 –0.10 –0.13 0.18 0.10 –0.15 0.00 0.10 0.74 1.00 0.36 0.16
VAR32 –0.07 –0.31 –0.08 0.05 0.00 –0.07 0.21 0.52 0.36 1.00 0.21
VAR33 0.03 0.07 0.04 0.05 0.07 –0.03 –0.05 0.19 0.16 0.21 1.00
 Bankruptcy Prediction 197

Table A4. Bankruptcy Probabilities of Listed Firms of Daewoo

from 1991 to 1996

Bankruptcy Probabilities

Firms 1991 1992 1993 1994 1995 1996

Daewoo Corp. 0.3686 0.3456 0.3394 0.3349 0.2870 0.2508

Daewoo Electronics 0.3752 0.4088 0.4055 0.4006 0.3593 0.3215
Daewoo Electronics 0.3001 0.2877 0.2266 0.2380 0.2684 0.2229
Components
Daewoo Heavy 0.3354 0.3746 0.3784 0.4360 0.4292 0.4116
Industries
Daewoo Telecom. 0.3657 0.3505 0.3311 0.3156 0.3447 0.3731
Keang Nam 0.2940 0.1712 0.2268 0.2837 0.3880 0.4160
Enterprises
Orion electric 0.1444 0.1292 0.1547 0.1524 0.2019 0.1658

© Blackwell Publishers Ltd. 2000.