Iwan editan - BANKRUPTCY PREDICTION MODEL WITH ZETAc...

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SIMPOSIUM NASIONAL AKUNTANSI VI Surabaya, 16 – 17 Oktober 2003 BANKRUPTCY PREDICTION MODEL WITH ZETA c OPTIMAL CUT-OFF SCORE TO CORRECT TYPE I ERRORS MOHAMAD IWAN Yogyakarta Abstract This research examines financial ratios that distinguish between bankrupt and non- bankrupt companies and make use of those distinguishing ratios to build a one-year prior to bankruptcy prediction model. This research also calculates how many times the type I error is more costly compared to the type II error. The costs of type I and type II errors (cost of misclassification errors) in conjunction to the calculation of prior probabilities of bankruptcy and non-bankruptcy are used in the calculation of the ZETA c optimal cut-off score. The bankruptcy prediction result using ZETA c optimal cut-off score is compared to the bankruptcy prediction result using a cut-off score which does not consider neither cost of classification errors nor prior probabilities as stated by Hair et al. (1998) and for later purposes will be referred to Hair et al. optimum cutting score. Comparison between the prediction results of both cut-off scores is purported to determine the better cut-off score between the two, so that the prediction result is more conservative and minimizes expected costs, which may occur from classification errors. This is the first research in Indonesia that incorporates type I and II errors and prior probabilities of bankruptcy and non-bankruptcy in the computation of the cut-off score used in performing bankruptcy prediction. Earlier researches gave the same weight between type I and II errors and prior probabilities of bankruptcy and non-bankruptcy, while this research gives a greater weigh on type I error than that on type II error and prior probability of non- bankruptcy than that on prior probability of bankruptcy. This research has successfully attained the following results: (1) type I error is in fact 59,83 times more costly compared to type II error, (2) 22 ratios distinguish between bankrupt and non-bankrupt groups, (3) 2 financial ratios proved to be effective in predicting bankruptcy, (4) prediction using ZETA c optimal cut-off score predicts more companies filing for bankruptcy within one year compared to prediction using Hair et al. optimum cutting score, (5) Although prediction using Hair et al. optimum cutting score is more accurate, prediction using ZETA c optimal cut-off score proved to be able to minimize cost incurred from classification errors. BACKGROUND Uncertain condition in Indonesian’s economy nowadays put firms in the risk of experiencing financial distress or even bankruptcy. Prediction error towards the continuity of an entity in the future can cause severe loss. There are two types of errors that may occur, namely type I error and type II error. If the prediction performed is a prediction about whether a firm is to file for bankruptcy or not in the future, then type I error can be comprehended as predicting a firm not to file for bankruptcy while in fact the firm does file for bankruptcy. Type II error on the contrary
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Iwan editan - BANKRUPTCY PREDICTION MODEL WITH ZETAc...

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