Investigation of prediction ability of Zavgren model and Relative valuation approach in assessing bankruptcy of the firms

Subject Areas : Financial Knowledge of Securities Analysis

Received: 2008-10-29 Accepted : 2009-01-10 Published : 2008-12-21

Keywords: Bankruptcy, relative valuation approach, Zavgren model, bankruptcy prediction models, logit regression model,

Abstract :

Bankruptcy of companies is one of the ways which cause the resourceto be wasted and the investment opportunities to be faded. In this researchwe are concerned with the prediction ability of Zavgren model inassessing bankruptcy of the companies Accepted in Tehran StockExchange and surveying correlation between bankruptcy probability andratios of relative valuation approach (P/E, P/CF, P/BV, P/S). Finally, weestimated Zavgren model using ratios of relative valuation approach. Inthis research we focused on a five-year period (1381-1385), in which weused data of year 1385 as a control group. The society under investigationcovers companies accepted in Tehran Stock Exchange. Because Zavgrenmodel is based on the business environment and economic structure offoreign companies, using companies existed in population (including 879observations), some modifications carried out in order to adapt this modelto Iranian companies. Finally, from among seven variables of Zavgrenmodel, four variables that have significant effect on discriminatingbetween bankrupt and non-bankrupt groups selected and the modelestimated with the use of them. Having done surveys for the model to befit, the estimated was studied with the data of year 1385 including 119companies, in order to measure ability and applicability of the model bythe use of external data. Ensuring the proficiency of the model, thecorrelation between bankruptcy probability and relative valuationapproach was examined. The results of the study indicated that there is asignificant correlation between bankruptcy and relative valuationapproach. Finally, Zavgren model estimated using ratio of relativevaluation approach. The result indicated that in the case of using P/Sratio, the validity of the model increased.