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Abstract
Firm bankruptcies have been tantalising investors, risk managers, markets, entrepreneurs/ investees, regulators, or even the State/ government as they may cause disruptions in the modus operandi of the interested stakeholders. The period during and cfter the financial and the subsequent sovereign crisis proved to be importantfrom that perspective, especially for countries that faced an extended adverse economic environment, such as Greece and Cyprus. This study attempts to predict bankruptcies of listed manufacturing firms domiciled in Greece and Cyprus by introducing a bankruptcy prediction model that employs discriminant analysis (DA) over a balanced matched sample of 42 firms for the period 2008-2015. Evidence is provided that a series cf financial ratios (quick ratio, cashflow interest coverage, and economic value added (EVA) divided by total assets) signficantly effect the predictability of bankruptcies in both countries. As a matter of fact, the tested determinants exhibited strong classfication accuracy, well in advance (three years), reflecting the global financial health of the firm under examination. This can be a valuable tool in the hands of the involved stakeholders, such as investors, risk officers, and the competent authorities.
Keywords: bankruptcy, discriminant analysis, distressed economies, economic value added, financial ratios, manufacturing firms
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Introduction
The Great Financial Crisis (GFC) of 2008 caused unanticipated global turmoil and a series of economic shocks. International markets were subjected to a new economic framework with long-term implications for the financial sector. Countries that were already distressed, facing debt amounts that had been accumulating over the years, like countries of the European South - among which the most proclaimed example/ case is Greece - entered a prolonged and painful financial crisis that definitely left its mark in their recent history. A rescue mechanism was put to work, offering a lending mechanism that would render the borrowing cost of these countries - and especially Greece - viable (also referred to as 'bail-out'). At the same time though, the public and private finances of the country had to be restructured so that the debt was serviceable; this resulted into a series of fiscal/ austerity measures which affected materially the (incomes of) households and enterprises of the country. The reduction of revenues led several firms to the verge of bankruptcy with a material number...