International Journal of Scientific Management and Development ISSN:2345-3974

Vol.2 (11), 578-587 November (2014)

Research Paper
A Comparative Assessment of Bankruptcy of the Companies Listed in Tehran Stock Exchange Based on DEA-
Additive and DEADA
Paria karimi1*, Solmaz sherkati sahlan2
1Master of financial management, Tehran University, Tehran, Iran
2Master of commercial management, Azad University of Tehran, Tehran, Iran.
Available online at: www.IJSMD.Com
Received 5th April 2014, Revised 11th May 2014, Accepted 22th May 2014
Abstract
People always suffer from phenomena like uncertainty, risk, and lack of awareness and they are always trying to reduce their
suffering. Increasing awareness can reduce risk and increase the possibility of prediction. Prediction based on information and
knowledge is different from Prediction based on Suspicion and conjecture. One of the concepts that can show the importance of
prediction is the concept of "bankruptcy" .Bankruptcy is a challenge that especially in this highly competitive era, many
companies are faced with. Therefore the analysis and prediction of bankruptcy are vital necessities, especially for investors.
Accordingly, the present study aims to introduce two techniques which are based on the Data Envelopment Analysis (DEA) in
order to be used in the analysis and prediction of bankruptcy of the companies listed on Tehran Stock Exchange.
The study is descriptive- applicable and to assess the models of bankruptcy analysis, 100 companies listed on the stock exchange
have been considered as statistical population. The DEA-Additive model and DEA-DA model are used to bankruptcy analysis.
The study finding showed that the DEA-DA model was 94% accurate in predicting the bankrupt companies and 80%
accurate in predicting the successful companies while the DEA-Additive model was 70% accurate in predicting the bankrupt
companies and 91% accurate in predicting the successful companies, so in total the DEA- DA model is more accurate than the
DEA-Additive model, and it is preferred.
Keywords: Bankruptcy, DEA- Additive Model, DEA- DA Model
Introduction of bankruptcy, each with its own strengths and weaknesses. In
People always suffer from phenomena like uncertainty, risk, the present study, the new two techniques have been used
and lack of awareness and they are always trying to reduce which are based on the model of Data Envelopment Analysis
their suffering. Increasing awareness can reduce risk and (DEA). These two techniques are "Additive model of DEA
increase the possibility of prediction. Prediction based on "and" Discriminant model of DEA". Accordingly, the present
information and knowledge is different from Prediction based study aims to evaluate and analyze the bankruptcy of listed
on Suspicion and conjecture (Yoon and Won, 2010). One of companies on stock exchange, based on the two techniques of
the concepts that can appear the importance of prediction is Additive model of DEA and Discriminant model of DEA and
the concept of "bankruptcy". The term of bankruptcy is then evaluation and comparison of accuracy of the two
derived from two Latin words of "bench" and "breaking". techniques has been performed.
Thus, the literal meaning of bankruptcy is "broken bench or
table". Based on the laws of France, the desk of the bankrupts Problem statement
and the offender had been broken and their properties had Along with the development of financial markets and the
been divided among creditors. The broken desk was a sign of subsequent domination of the competitive situation, many
punishment and a warning to other businessmen that the companies will be bankrupt and out of the competition. This
broken desk may lead to weak the credibility of businessmen problem is cause of concern of capitalists and other
in the market (Chava and Jarrow, 2004). So the word of stakeholders. And they are looking for approaches to predict
"broken bench" was used to this concept which gradually the financial crisis to avoid losing the principal and interest of
changed to the word of "bankruptcy". Investors and creditors their capital (Charitou & Trigeorgis, 2000). Bankruptcy is one
are tended to predict the bankruptcy because the bankruptcy of the most important problems of companies and in fact it is
imposes huge losses on them (Aziz and Dar, 2006). tied to survival which is the initial and basic goal of any
Bankruptcy is an event that has a significant impact on the organization. Bankruptcy will undermine and affect a wide
management, shareholders, employees, creditors, customers range of stakeholders including individuals, organizations and
and other stakeholders (Altman, 1968). With early warning of in general a big part of the community. Exactly definition of
the possibility of bankruptcy, investors and management will these stakeholders groups is difficult, but it can be argued that
be able to take preventive actions and to identify the favorable the management, investors, creditors, competitors and legal
and undesirable opportunities to capitalize. In fact, predicting institutions will be more affected than others by bankruptcy
the continued activity of economic units in future is and among these five groups, investors and creditors will be
considered as an important element of investment decision more affected than other stakeholders and therefore they have
making. Bankruptcy analysis is a suitable tool for predicting greater tendency to predict the bankruptcy (Chava and Jarrow,
the occurrence or nonoccurrence of bankruptcy which helps 2004). The fears and losses arising from the bankruptcy have
investors to assess the probability of bankruptcy of the become it important to assess and predict. Bankruptcy will
companies (before the investment) based on information of the impose the significant direct and indirect costs on
companies' prior operating records (Fedorova et al, 2013). In shareholders. Direct costs, including the costs of the
previous years various approaches were made to the analysis proceedings, the lawyers and auditing can be equal to 5% to
more than 28% of the value of the stock or equity capital
*Correspondent Author: Paria karimi (pariakarimi@hotmail.com)
Manuscript No: IJSMD-KINA-2014-259
(Warner, 1977). Estimation of indirect costs include the cost

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of lost sales, lost profits, higher financing costs and lost
investment opportunities which are more serious than the
direct costs, is more difficult (Altman, 1984). Therefore the
need to understand the possibility of bankruptcy is very
important because it leads to the desired decision making of
the managers and investors in order to reduce costs
(Premachandra et al, 2009). Investors and shareholders
through an accurate and timely prediction of bankruptcy can
keep themselves safe from potential damage and financial loss
(Andres et al, 2012). Bankruptcy prediction by providing
necessary warnings can increase the awareness of managers
and investors about the probability of going bankrupt and
leads to identify the optimal investment opportunities from the
unfavorable investment opportunities by investors. But all this
desirability depends on the accurate and timely analysis and
prediction of bankruptcy. If the carefulness and accuracy of
the bankruptcy prediction is low or the prediction is not done
at the appropriate time, the prediction may damage investors
and impose more loss on them than bankruptcy itself (Ravi
Kumar and Ravi, 2007). Numerous diverse new tools and
techniques are ever provided to analyze and predict the
bankruptcy (Includes: Models of Altman, Shyrata, Ohlson,
Zimysky, Aspryngyt, C I score, Fulmar, model of genetics of
Farajzadeh and model of genetics of McKee). Each of these
models and methodologies has different accuracy and actual
challenge that investors and other stakeholders are faced with,
is the selection of the more appropriate and accurate tools and
techniques for predicting the bankruptcy. The methods with
higher accuracy can provide more reliable results and lead to
the more desired and better decision making. In the present
study, two of the newest techniques of analysis and prediction
of bankruptcy have been used which both of them are driven
from the Data Envelopment Analysis model.
Importance and necessity of the research
The importance and necessity of this study can be discussed
from two viewpoints or perspectives. In a first aspect, the
present research is necessary based on the importance of
bankruptcy necessity. It is obvious that the importance of
bankruptcy is clear for all of stakeholders, including investors,
creditors and company directors, but especially in domestic
literature, the subject of bankruptcy prediction has been
discussed fewer. In fact the financial crisis, which causes
company inability to paying back the debts, accrues before the
bankruptcy which can be predicted through an appropriate
model and credit rating, and therefore the company directors
will have sufficient time for response and investors also can
assess the favorable and no favorable opportunities of
investment (Serrano-Cinca & Gutirrez-Nieto, 2013).
In the second aspect, the present study is based on new
advanced analysis techniques which are based on the model of
DEA, and therefore this study is new and important.
Bankruptcy analyzing and prediction based on the DEA and
Discriminant analysis is done based on a compare between the
financial reports and ratios of the companies. In fact the main
advantage of DEA model compared whit the classical methods
such as the Regression of Logistics and Ohlson logit Analysis
lies on this comparative concept. In the bankruptcy analysis
based on data envelopment analysis, the financial ratios of the
companies arent been compared with a specific standard nor
the market average, but the comparison measure is the
performance of all companies. In other words, the model of
International Journal of Scientific Management and Development
ISSN:2345-3974
DEA studies and assesses the financial performance of
companies based on specific techniques, and through forming
the bankruptcy frontier, identifies the companies subjected to
bankruptcy and insolvency from successful companies. DEA
is a new, practical, fast and relatively easy tool to assess the
bankruptcy of companies (Sueyoshi and Goto, 2009).
The research background
Little research on the world has dealt with bankruptcy analysis
based on DEA model. Accordingly, the following are some of
the most important research done in the area of bankruptcy
analysis based on DEA.
Sueyoshi and Goto (2009) have conducted a research to
compare the (DEA-DA) and the DEA models ability to assess
the bankruptcy and to evaluate and compare the strengths and
weaknesses of each of these two techniques. The research
findings showed that the method of data envelopment analysis
(DEA) is a suitable managerial tool for early evaluation of
bankruptcy and is more useful specifically for busy executives
such as financial managers, while the DEA-DA model is
useful for researchers who want to accurately assess the
processes of bankruptcy at a specified time interval.
Premachandra et al (2009) in a study entitled "DEA as a tool
for bankruptcy analysis" have done a comparative study with
logistic regression techniques. In this paper data envelopment
analysis which is non-parametric method was introduced as a
quick and easy tool to assess the company's bankruptcy and
the results were compared with the prediction accuracy the
logistic regression (LR) which is a parametric method. The
findings of this study showed that the DEA method is more
accurate in bankruptcy prediction than the logistic regression
and this method is also more effective for low sample size.
Janava et al (2012) in their study used the DEA method to
assess the bankruptcy of companies in the field of agriculture.
The researchers introduced the DEA method as a useful and
powerful tool for bankruptcy prediction and they could predict
the bankruptcy of the agricultural companies with a high
accuracy.
Research variables
As noted, in the study DEA-DA and Additive DEA are used to
predict the bankruptcy of the firms listed on the Stock
Exchange. These technique which will be explained later,
using the comparison of the inputs and outputs to assess the
bankruptcy. This comparison indicates that whether the unit or
firm has had an acceptable performance based on these inputs
and outputs. The inputs and outputs are the same variables that
are actually involved in bankruptcy of firms and they are
criteria for the evaluation of bankruptcy of the firms which
will be used by two techniques.
Inputs and outputs concepts in the bankruptcy analysis
Traditional or relative DEA models (e.g., CCR and BCC
models) assessed the performance of the decision making
units that could be people, firms and ... .In evaluating the
efficiency of the units by relative models, a number of inputs
and a number of outputs as criteria for comparing the
performance of the units were considered. The inputs are in
fact the same resources which enter to the decision making
unit to achieve desired outcomes. In fact inputs are costs and
materials that a single decision making unit can spend to
achieve the desired results. Outputs are the result of the
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performance of the decision making unit after the application
of inputs. The efficiency of each unit was assessed based on
the ratio of output to input and the units with higher ratio of
output to input were more efficient (Charnes et al, 1985).
These traditional models can not been used to assess and
analyze the bankruptcy of the firms listed on stock exchange,
because firstly, the traditional models are not able to assess the
data with negative value, which generally there are among the
financial data and secondly, identification and separation of
inputs and outputs for bankruptcy analysis, as mentioned, is
not possible in this approaches. Accordingly, experts in the
field of bankruptcy analysis especially Sueyoshi (1999,
2001, 2005, 2009), using data envelopment analysis, have
changed the inputs and outputs concepts in the bankruptcy
analysis. Using data envelopment analysis, inputs and outputs
will have different concepts. In the bankruptcy analysis,
variables and financial ratios which have an important impact
on the bankruptcy of a firm and weaken the company's
performance are considered as the outputs and financial
variables which haven't significant impact on the possibility of
the bankruptcy of a firm, are considered as inputs.
In the present study, based on the literature review as well as
opinions of experts and specialists in the field of stock market,
the following variables were considered as inputs and outputs
of bankruptcy evaluation.
Output variables
Finally, based on research done in the areas of bankruptcy
(such Sueyoshi and Goto, 2009; Sueyoshi, 1999;
Sueyoshi 2001; Sueyoshi, 2006, and Premachandra et al,
2009) the following financial ratios are considered as output
variables in bankruptcy analysis:
The ratio of total debt to total assets (debt or leverage ratio)
Current debt to total assets ratio
Input variables
Based on research done in the areas of bankruptcy (such
Sueyoshi and Goto, 2009; Sueyoshi, 1999; Sueyoshi
2001; Sueyoshi, 2006, and Premachandra et al, 2009) the
following 7 financial ratios are considered as input variables
in bankruptcy analysis:
Cash flow to total assets ratio
Net income to total assets ratio
Working capital to total assets ratio
The ratio of current assets to total assets
Earnings before interest and taxes to total assets ratio
Earnings before interest and taxes to interest expense ratio
Ratio of stock market value to book value of equity
Hypotheses
The main hypotheses of the present study can be explained as
follows:
1. Additive model of data envelopment analysis (DEA-
Additive) has high accuracy in bankruptcy prediction of the
firms listed on Stock Exchange.
2. Discriminant model of DEA (DEA-DA) has high accuracy
in bankruptcy prediction of the firms listed on Stock
Exchange.
3. Discriminant model of DEA (DEA-DA) has higher
accuracy in bankruptcy prediction of the firms listed on Stock
Exchange compared with the Additive model of data
envelopment analysis (DEA-Additive).
Research methodology
International Journal of Scientific Management and Development
ISSN:2345-3974
Research method
This study aimed to assess the condition of bankruptcy of the
firms listed on Tehran Stock Exchange. The choice of research
method depends on the research objectives, the nature and
subject of the research and its administrative features. This
study, depending on the type of questions and the method of
data gathering is a descriptive research. The aim of the present
study is classified as applicable research. So this research is a
descriptive- applicable research.
Statistical population and sample
The statistical population of this study is formed from all firms
listed on Tehran stock exchange in 2012. In total about 480
firms are listed on Tehran Stock Exchange which was
considered as research population. Of these companies, 100
firms were selected randomly as the research sample and all
data relating to these firms were collected from the official site
of the Tehran Stock Exchange (www.seo.ir).
Data collection tool
There are different methods for gathering data of the
population, including questionnaires, interviews, observation
and documentation methods. In this research, real data of the
firms listed on stock exchange were used. According to the
reality of data collected the reliability and validity of data
collected is approved.
Methods of data analysis
In the present study in order to evaluate and analyze the
collected data for bankruptcy analysis of the firms listed on
the Stock Exchange two techniques of data envelopment
analysis (DEA), (the Additive model of data envelopment
analysis (DEA-additive) and discriminant data envelopment
Analysis (DEA-DA)) were used. In general the DEA-DA
method is based on an optimization technique using the liner
programming model which is introduced by Charnes (1987).
Initial DEA models are techniques which are used in order to
assess and compare of the relative efficiency of decision
making units (DMUs) that have similar functions but different
inputs and outputs.
DEA as a nonparametric technique is defined for measuring
the efficiency of a decision making unit with multiple inputs
and outputs (Cullinane, 2006). In fact this method is a
mathematical programming approach for evaluating the
efficiency of decision making units that have various inputs
and various outputs. These definitions of DEA which
generally have introduced DEA as a tool to measure relative
efficiency are descriptor of the relative or traditional DEA
models. The number of traditional models of DEA has
increased and these models are becoming more specialized.
But the bases of the all traditional models of DEA are the
models with constant returns to scale (CCR) and variable
returns to scale (BCC) (Charnes et al, 1987). DEA model can
also be divided in terms of input-orientation or output
orientation. So generally there are four categories of
traditional DEA models. These models are CCR-input
oriented model, CCR- output oriented model, BCC- input
oriented model and BCC- output oriented model. The
applications of data envelopment analysis increased over the
time and this technique was used in other areas besides the
measurement of relative efficiency. One of the main
applications of this model in recent years has been bankruptcy.
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Vol.2 (11), 578-587 November (2014)
Two main and well known DEA models in evaluating of outputs. To evaluate the performance or bankruptcy of each
bankruptcy are Additive model of data envelopment (DEA- unit, a model as equation (1) will be formed.
Additive) and Discriminant model of data envelopment (DEA-
DA) that are used in this paper. The two models are described The differences between the model of additive DEA and
below. relative models
Additive model of data envelopment analysis (DEA- In the additive model of DEA Unlike the relative models (such
additive) as CCR and BCC) variables with negative values which there
DEA additive model which was introduced for the first time are in many financial analysis are allowed to enter the model
by Charnes et al (1985), is a model designed for evaluating the too. In fact, it's one of the advantages of this method compared
performance or failure of a single specific decision making with the relative models. Moreover, analysis and interpretation
unit compared with the other decision-making units. This of model results of performance or bankruptcy in additive
DEA model in recent years is used widely in different studies, DEA method unlike the relative models, does not depend on
particularly in the areas of bankruptcy (such Sueyoshi and the input or output orientation of model and both input and
Goto, 2009; Premachandra et al, 2009). The general form of output are considered simultaneously. Also, in evaluation of
DEA additive model for h 'th decision making unit (DMU) performance or bankruptcy in the additive DEA model, unlike
can be as following equation: the relative method, which consider both of the optimal value
k s of the objective function and the covariates, only considers of
Min Si+ + Sr the optimal value of the covariates. Another advantage of the
i=1 r=1 additive DEA method is its convenience and speed of
n calculations. In the additive DEA model unlike analyze of
s. t. xij j + Si+ = xih i = 1, , k efficiency in which there is frontier of efficiency, there is
j=1 bankruptcy frontier. Bankruptcy frontier has a different
n
definition from efficiency frontier. In the bankruptcy analysis,
yrj j + Sr = yrh r = 1, , s it is expected that more firms or units that have poor
j=1 performance or can be considered as default firms, are located
n
on the bankruptcy frontier and firms or units that have good
j = 1 performance or can be considered as non- default firms, are
j=1 located under the bankruptcy frontier. Bankruptcy frontier in
Si+
0 , Sr 0 , j 0 situations where there is only one input and one output can be
Equation (1): Additive model of data envelopment analysis illustrated such as below. Units marked with a cross ()
indicate the default units which majority of these units are
(DEA-additive) located on the frontier of bankruptcy. The units marked with a
circle ( ) are Non default units and the majority of the units
Where Xij indicates the i'th input variable of j'th DMU, Yrj, the are located under the bankruptcy boarder (Sueyoshi and
r'th output variable of j'th DMU, n, the number of DMUs, The Goto, 2009; Premachandra et al, 2009). Moreover, in
first constraint set (which is the restrictions on input bankruptcy analysis unlike the efficiency analysis much input
variables), The second constraint set (which is the restrictions values and lower output values of unit is better and leads to
on output variables), k, the number of inputs and s, the number get the unit away from the bankruptcy boarder (Sueyoshi
and Goto, 2009).

Fig (1): Bankruptcy frontier

Bankruptcy analysis steps in the DEA-additive
Based on the above discussions, Bankruptcy analysis steps in
the additive DEA can be summarized as follows:
Step 1: form additive DEA (Equation 1) for a single unit or
firm which is under study.
Step 2: Get the optimal solution of the model of Step 1.in the
optimal solution of this model, if the values of all covariates
(S) are equal to zero, the firm or unit is located on the
bankruptcy boarder; but if one or more values of the
covariates are positive or greater than zero, the firm or unit
will be located under the bankruptcy boarder.
Step 3: complete the Steps 1 and 2 for all units or firms then
go to the step 4.
Step 4: classify all the units or firms in following four
categories:

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a)
Default firms which are located on the bankruptcy
boarder
b) Default firms which are located under the bankruptcy
boarder
c) Non Default firms which are located under the
bankruptcy boarder
d) Non Default firms which are located on the
bankruptcy boarder
Step 5: calculate the number of the firms relating to any
previous steps and then calculate the following probabilities:
a) The ratio of default firms located on the boarder on
BR
the entire default firms)P ( )(
BR
b) The ratio of default firms located under the boarder
NBR
on the entire default firms(P ( ))
BR
c) The ratio of Non- default firms located under the
boarder on the entire Non- default firms(P ( ))
NBR
NBR
d) The ratio of Non- default firms located on the
BR
boarder on the entire Non- default firms(P ( ))
NBR
Step 6: it is expected that more Non- default firms are located
under the bankruptcy boarder and more default firms are
located on the bankruptcy boarder. Accordingly, the rate of
BR NBR
correct classification will be identified by (P ( )+ P ( ))
BR
NBR
and the rate of incorrect classification by (P ( )+ P (
BR
ISSN:2345-3974
In this equation, the first restrictions set, indicates the
limitations of the first group (successful firms); the second
restrictions set, indicates the limitations of the second group
(default firms), Zij, the Inputs and outputs values for each unit
or firm; i and i, respectively, the weight of the inputs and
outputs of the first and second groups units; d, value or
threshold; and the S values, covariates of the limitations. After
solving the linear programming model of equation (2) based
on the data of surveyed firms, the optimal threshold value (d*)
and the optimal values of input weight and output weight (i*
and i*) will be given. Then based on the optimal values, each
of the units will fall in one of the following three categories
(Zim indicates the number of inputs and outputs of the m'th
unit):
The first category - if the following inequality is satisfied for
m'th firm, this firm is located in the interference area of the
first and second groups (G1 G2):
k k k
i Zim > d i Zim i Zim d
i=1 i=1 i=1
k
< i Zim
i=1
The second category - if the following inequality is satisfied
for m'th firm, this firm is among of the second groups (G 1)
NBR
BR
)). (successful firms):
NBR k k

Discriminant model of data envelopment analysis (DEA- i Zim

d i Zim d
i=1 i=1
DA)
The third category - if the following inequality is satisfied
Discriminant model of data envelopment analysis (DEA-DA)
for m'th firm, this firm is among of the second groups (G 2)
that was first introduced in 1999 by Sueyoshi, is actually a
(default firms):
combination of DEA model and Discriminant analysis (DA) k k
which has the strengths of both of these techniques.
i Zim
<d i Zim < d
Discriminant model of DEA for bankruptcy analysis has two
i=1 i=1
stages, which are:
Accordingly, in the first phase the position of many surveying
First- identification and classifying the overlap: this step
firms will be determined whether they are among the first or
classifies the firms in order to bankruptcy analysis in three
second group but the position of the firms which are located in
categories as: The first group (G1) successful firms, the second
the overlap area won't be determined in this phase. So, in
group (G2) default firms and the third group (G1 G2) overlap
order to determine the bankruptcy status of these firms, the
firms which may be allocated to each of the first and second
second phase was added to the model.
groups. Linear programming model of the first step can be
indicated as follows: Second: control or review the overlap: This stage will
+
Min S1j + S2j determine that each unit in the overlap area is in which one of
jG1 jG2 the groups, first or second. Linear programming model of the
k second step can be indicated as follows. In this model, only
+ the input and output data of units located in the overlapping
s. t. i Zij + S1j S1j =d jG1
i=1 area will be undertaken in the first step.
k +
+
Min S1j + S2j
i Zij + S2j S2j = d jG2 jG1 jG2
i=1 k
k
+
s. t. i Zij + S1j S1j =d jG1
i = 1
i=1
i=1 k
k
+
i Zij + S2j S2j =d jG2
i = 1
i=1
i=1 k
All S 0, i 0, i 0
i = 1
Equation (2): Additive model of data envelopment analysis
i=1
(DEA-additive) - Phase I All S 0, i 0, i 0
Equation (3): Discriminant model of data envelopment
analysis (DEA- DA) - Phase II

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Vol.2 (11), 578-587 November (2014)
After solving the model of equation (3) for the firms of the unfavorable condition which are called as default firms. In this
overlapping area, the optimal threshold value (d*) and the research 90 successful and 10 default companies listed in the
optimal weight of inputs and outputs (i*) will be given. Then stock exchange were selected based on their financial reports.
based on the optimal values, each of the remaining units will In order to verify the correctness of the classification of these
fall into one of two categories below: firms, T-test for two independent samples was used.
The first category - if the following inequality is satisfied for Accordingly the H0 and H1 of this test can be expressed as
m'th firm, this firm is among of the first group (successful follows:
firms) (G1): H0: The mean levels of the variables of the research are equal
for default and Non- default firms.
k
H1: The mean levels of the variables of the research are
i Zim d different for default and Non- default firms.
i=1 The results of the test are shown in the following table. In
The second category - if the following inequality is satisfied Table 1, for the interpretation of results, statistic F (Levene
for m'th firm, this firm is among of the second group (default test) should be considered. If significance level or sig is
firms) (G2): greater than 0.05, then the hypnosis of the equality of
k
variances of two groups of firms will be verified and the
i Zim < d results of the first raw will be used in order to interpret the
i=1 results of the differences of the means. But if significance
The steps 4 to 6 of additive DEA method, which involves level or sig is lower than 0/05, then the hypnosis of the
calculating the rate of correct classification and correct inequality of variances of two groups of firms will be verified
classification of firms in to the groups, can also be used for and the results of the second raw will be used in order to
Discriminant DEA. For data analysis based on two techniques, interpret the results of the differences of the means. Then,
LINGO software package was used. based on the t-statistic and its significance level one can
interpret the difference or equality of the input and output
Findings of research variables of the two groups. If the t-statistic is less than 1/96
Identification of the successful and the default firms or significance level (sig) is greater than 0/05, the H0 will be
According to the logic of the DEA models to assess the firms' confirmed and otherwise H1 that indicates the difference of
bankruptcy, some of the firms in terms of input and output two groups' means will be confirmed. Based on the test results
variables, must be in a good and favorable condition namely in Table 1, the means of all input and output variables for the
successful or Non- default firms and some of the firms in two groups of the default and Non- default firms are
terms of input and output variables, must be in a bad and significantly different.
Table (1): The test of difference of the mean of the variables for the two groups of the default and Non- default firms
Research variables F sig t sig 95% Confidence Interval Result
(2- tailed) Lower Upper
Bound Bound
TDTA Equality of variances 0.763 0.387 2.712 0.009 0.169 0.356 H1 confirmed
Inequality of variances 2.621 0.016 0.237 0.424
CLTA Equality of variances 0.462 0.435 2.123 0.036 0.156 0.338 H1 confirmed
Inequality of variances 2.136 0.031 0.241 0.423
CFTA Equality of variances 1.440 0.231 1.983 0.047 0.047 0.078 H1 confirmed
Inequality of variances 1.981 0.048 0.036 0.067
NITA Equality of variances 2.560 0.112 3.037 0.000 -12.305 -3.539 H1 confirmed
Inequality of variances 3.037 0.000 -13.410 -4.645
WCTA Equality of variances 0.940 0.334 5.013 0.000 -0.127 -0.077 H1 confirmed
Inequality of variances 5.001 0.000 -0.114 -0.066
CATA Equality of variances 0.059 2.360 4.210 0.000 0.022 0.060 H1 confirmed
Inequality of variances 3.980 0.000 0.031 0.078
EBTA Equality of variances 0.417 0.520 2.561 0.015 0.036 0.116 H1 confirmed
Inequality of variances 2.467 0.019 0.061 0.116
EBIE Equality of variances 0.156 0.693 5.345 0.000 -12.25 -3.30 H1 confirmed
Inequality of variances 4.789 0.000 -8.43 -0.513
MVCE Equality of variances 0.468 0.495 4.056 0.000 2.331 4.123 H1 confirmed
Inequality of variances 4.098 0.000 2.129 3.789

CFTA: cash flow/total assets, NITA: net income/total assets,

WCTA: working capital/total assets, CATA: current
assets/total assets, EBTA: earnings before interest and
taxes/total assets, EBIE: earnings before interest and
taxes/interest expense, MVCE: market value of equity/book
value of common equity, TDTA: total debt/total assets,
CLTA: current liabilities/total assets.
Bankruptcy analysis using the DEA-Additive technique-
Test of the first hypothesis
After setting up the model of equation (1) based on the input
and output values for all surveyed firms, the results of the
DEA-Additive technique gained. These results include values
of covariates related to the optimal solutions of the models of
each firm. If the value of all covariates is zero, the target firm

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Vol.2 (11), 578-587 November (2014)
is on the bankruptcy frontier and otherwise, the target firms
are under the bankruptcy frontier. The results of the additive
DEA for a total of 100 firms surveyed, 15 firms were on the
bankruptcy frontier or in the danger zone and 85 firms were
under the bankruptcy frontier or in the safe zone. 15 of the
firms on the bankruptcy frontier are more likely to be
bankrupt; but other 85 firms which are under the bankruptcy
frontier are in good financial condition based on their financial
ratios and they are therefore less likely to be bankrupt.
After determining that the firms on and under the bankruptcy
frontier, four different modes will be given as shown in Table
2. As it can be seen on this table, from a total of 90 Non-
default firms, 82 firms were under the bankruptcy frontier and
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8 firms were on the bankruptcy frontier. Also, from a total of
10 default firms, 7 firms were on the bankruptcy frontier and 3
firms were under the bankruptcy frontier. In general, the
greater numbers of the Non- default firms which are under the
bankruptcy frontier as well as the greater numbers of the
default firms which are on the bankruptcy frontier, indicates
that the DEA model is more precise. In the present study, due
to the large number of Non- default firms (82 firms of a total
of 90 firms) are under the bankruptcy frontier and the large
number of default firms (7 firms out of 10 firms) are on the
bankruptcy frontier, it can be said that DEA- Additive model
is an appropriate model for prediction of the bankruptcy.

Table (2): Bankruptcy analysis results using the DEA- Additive technique (classification of 4 groups)
On the bankruptcy frontier under the bankruptcy frontier Total
Non- default firms 8 82 90
default firms 7 3 10
Total 15 85 100
According to four categories identified or classified in Table is larger, the accuracy and ability of the DEA- Additive model
2, the following ratios or possibilities are given on the Table 3. to predict the bankruptcy will be higher. According to high
If the number of default firms on the bankruptcy frontier values obtained in this study for these ratios (70% and 91%
BR respectively), high accuracy of the DEA- Additive model in
divided by the total number of default firms (P ( )) as well
BR predicting the bankruptcy of the listed firms and therefore the
as the number of non-default firms under the bankruptcy
NBR
first hypothesis of this study will be confirmed.
frontier divided by the total number of default firms (P ( ))
BR
Table (3): Bankruptcy analysis results using the DEA- Additive technique (calculation of possibilities)
ratios possibilities
BR 7
P( ) = 0.70
BR 10
NBR 3
P( ) = 0.30
BR 10
NBR 82
P( ) = 0.91
NBR 90
BR 8
P( ) = 0.09
NBR 90
BR
(P ( )= the number of default firms on the bankruptcy
BR Bankruptcy analysis using the DEA-DA - Test of the second
NBR
frontier divided by the total number of default firms. P ( ) hypothesis
BR
= the number of default firms under the bankruptcy frontier First step: after solving the linear programming model of
NBR
divided by the total number of default firms. P ( ) = the equation (2) based on the data of studied firms, the optimum
NBR threshold value (d*) and the optimal values of input weight
number of non-default firms under the bankruptcy frontier and output weight of the two groups (i* and i*) is given.
BR
divided by the total number of non-default firms. P ( )= The optimal values of the threshold value (d*) and the
NBR
the number of non-default firms not on the bankruptcy weights of the inputs and outputs (i* and i*) for studied
frontier divided by the total number of non-default firms) firms, after solving the model (2) was achieved in the
following table:

Table (4): The optimal values of weight of the variables of two groups and threshold value - first step
Variables Outputs Inputs
CLTA TDTA CFTA NITA WCTA CATA EBTA EBIE MVCE

variables optimal 9 =0.045 8 =0.126 7 =0.000 6 =0.003 5 =0.410 4 =0.122 3 =0.000 2 =0.001 1 =0.293
weight for G1
variables optimal 9 =0.000 8 =0.000 7 =0.000 6 =0.000 5 =0.000 4 =0.000 3 =0.335 2 =0.000 1 =0.665
weight for G2
optimal threshold d =0.166
value
After calculation of ki=1 i Zim and ki=1 i Zim for all three groups will be determined. The results of this analysis
surveyed firms and given an optimal threshold value (d*), the showed that 68 firms were under the bankruptcy frontier or in
condition of each firm stating that they are among of which of the first group, 7 firms were on the bankruptcy frontier or in

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the second group and 25 firms were on the overlapping area of
the two groups. Accordingly, at the first phase, the status of
many firms was identified (68 firms under the frontier and 7
firms on the frontier). But the status of the firms in the region
of overlapping was unknown. So in the second step, the
condition or status of the firms in the region of overlapping is
determined.
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Second step- after solving the linear programming model of
equation (3) based on the data of the firms of the overlapping
area, the optimum threshold value (d*) and the optimal input
weight and outputs weight (i*) is obtained which are
summarized in Table 5:

Table (5): The optimal values of weight of the variables of two groups and threshold value (based on the data of the firms
of the overlapping area)
Variables Outputs Inputs
CLTA TDTA CFTA NITA WCTA CATA EBTA EBIE MVCE
variables 9 =0.035 8 =0.137 7 =0.000 6 =0.006 5 =0.366 4 =0.152 3 =0.000 2 =0.023 1 =0.281
optimal weight
optimal d =0.158
threshold value

After calculation of ki=1 i Zim for all firms in the
overlapping zone and given an optimal threshold value (d*),
the condition of each firm stating that they are among of
which of two groups will be determined. The results of this
analysis showed that 6 firms were under the bankruptcy
frontier or in the first group and 19 firms were on the
bankruptcy frontier or in the second group. Therefore, based
on the DEA- DA model, from 100 firms, 87 firms were
identified under the bankruptcy frontier and 13 firms on the
bankruptcy frontier.
After determining that the firms on and under the bankruptcy
frontier, four different modes will be given as shown in Table
6. As it can be seen on this table, from a total of 90 Non-
default firms, 85 firms were under the bankruptcy frontier and
5 firms were on the bankruptcy frontier. Also, from a total of
10 default firms, 8 firms were on the bankruptcy frontier and 2
firms were under the bankruptcy frontier. In the present study,
due to the large number of Non- default firms are under the
bankruptcy frontier and the large number of default firms are
on the bankruptcy frontier, it can be said that DEA- DA model
is an appropriate model for prediction of the bankruptcy.

Table (6): Bankruptcy analysis results using the DEA- DA model (classification of 4 groups)
On the bankruptcy frontier under the bankruptcy frontier Total
Non- default firms 5 85 90
default firms 8 2 10
Total 13 87 100
According to four categories identified or classified in Table the DEA- DA model to predict the bankruptcy will be higher.
6, the following ratios or possibilities are given on the Table 7. According to high values obtained in this study for these ratios
As mentioned before, if the number of default firms on the (80% and 94% respectively), high accuracy of the DEA- DA
bankruptcy frontier divided by the total number of default model in predicting the bankruptcy of the listed firms and
BR therefore the second hypothesis of this study will be
firms (P ( )) as well as the number of non-default firms
BR confirmed.
under the bankruptcy frontier divided by the total number of
NBR
default firms (P ( )) is larger, the accuracy and ability of
BR
Table (7): Bankruptcy analysis results using the DEA- DA technique (calculation of possibilities)
ratios possibilities
BR 8
P( ) = 0.80
BR 10
NBR 2
P( ) = 0.20
BR 10
NBR 85
P( ) = 0.94
NBR 90
BR 5
P( ) = 0.06
NBR 90

8.4. The comparison of the two techniques of DEA-Additive
and DEA-DA in bankruptcy prediction Test of the third
hypothesis
Probabilities of correct and incorrect classification of surveyed
firms based on two models are summarized in Table 8 that
make it possible to compare the accuracy of the techniques in
the bankruptcy prediction.
The number of default firms on the bankruptcy frontier
BR
divided by the total number of default firms P ( ) as well as
BR
the number of non-default firms under the bankruptcy frontier
NBR
divided by the total number of default firms P ( ) indicate
BR
the accuracy of the models while the lower values of the
number of default firms under the bankruptcy frontier divided
by the total number of default firms as well as the number of

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Vol.2 (11), 578-587 November (2014)
non-default firms on the bankruptcy frontier divided by the
total number of default firm show
the accuracy of the models.
According to Table 8, the number of default firms on the
bankruptcy frontier divided by the total number of default
firms for additive model is 70% which indicates that 70% of
default firms are located on the bankruptcy frontier correctly
and 30% of default firms are located under the bankruptcy
frontier incorrectly. This ratio for DEA-DA model is 80%
which is interpretable similarly. Therefore, the DEA-DA
model is more accurate than the DEA- Additive for predicting
the bankruptcy risk.
Also, according to Table 8, the number of Non- default firms
under the bankruptcy frontier divided by the total number of
Table (8): the comparison of the two techniques of DEA-Additive and DEA-DA in bankruptcy prediction
ratios DEA-Additive
BR 70%
P( )
BR
NBR 30%
P( )
BR
NBR 91%
P( )
NBR
BR 9%
P( )
NBR
Conclusions
All business activities and the planning processes are
performed in order to achieve success, but all of them cannot
find their target. Always there are many companies which fail.
The numbers of bankrupt businesses and amount of debts for
the bankruptcy is widely grown in the world and every year a
large number of companies, especially new companies will be
bankrupt (Zhou, 2013). Bankruptcy is approximately an
ancient phenomenon and may occur in a small retail store
which is unable to meet its commercial obligations or also in a Additive) and Discriminant model of data envelopment (DEA-
large manufacturing company due to the lack of favorable
liquidity and continuing annually occurred losses. In America,
despite economic growth without interruption in last decades,
the annual rate of bankruptcy is increased 5 times and the
number of people, who are bankrupt, has reached more than
1.5 million per year (Lyandres and Zhdanov, 2013). Such a
growth of bankruptcy is more obvious in developing countries
than in developed countries and many companies will be
bankrupt annually. If bankruptcy occurs in the big companies
and industries such as corporations, may impose huge losses
and expenses on investors. Accordingly, analysis and
evaluation of bankruptcy by investors before buying the shares
of the companies is essential and very important that can help
prevent many potential losses (Wu et al, 2010).
In this regard, in the current study, 100 companies listed in
Tehran Stock Exchange have been analyzed and evaluated
regarding bankruptcy status and two techniques or models of
additive data envelopment analysis (DEA-Additive) and
Discriminant models of DEA (DEA- DA) were introduced for
this purpose. DEA as a nonparametric technique is defined for
measuring the efficiency of a decision making unit with
multiple inputs and outputs (Cullinane, 2006). The number of
traditional models of DEA has increased and these models are
becoming more specialized. But the bases of the all traditional confirmed. so in total the DEA-Discriminant Analysis model
models of DEA are the models with constant returns to scale
(CCR) and variable returns to scale (BCC) (Charnes et al,
1987). DEA model can also be divided in terms of input-
orientation or output orientation. So generally there are four
International Journal of Scientific Management and Development
ISSN:2345-3974
Non- default firms for additive model is 91% which indicates
that 91% of Non- default firms are located under the
bankruptcy frontier correctly and 9% of Non- default firms are
located on the bankruptcy frontier incorrectly. This ratio for
DEA-DA model is 94% which indicates that 94% of Non-
default firms are located under the bankruptcy frontier
correctly and 6% of Non- default firms are located on the
bankruptcy frontier incorrectly. Therefore, the DEA-DA
model is more accurate than the DEA- Additive for
identifying the firms which are less likely to be bankrupt too.
Therefore, in total the DEA-DA model is more accurate than
the DEA- Additive for predicting the bankruptcy risk and the
third hypothesis of research is confirmed.
DEA-DA
80%
20%
94%
6%
categories of traditional DEA models. These models are CCR-
input oriented model, CCR- output oriented model, BCC-
input oriented model and BCC- output oriented model. The
applications of data envelopment analysis increased over the
time and this technique was used in other areas besides the
measurement of relative efficiency. One of the main
applications of this model in recent years has been bankruptcy.
Two main and well known DEA models in evaluating
bankruptcy are Additive model of data envelopment (DEA-
DA) that are used in this paper.
Based on the bankruptcy analysis with DEA-Additive model,
15 firms were on the bankruptcy frontier that means those
firms were in danger of bankruptcy and 85 firms were under
the bankruptcy frontier or far from the bankruptcy danger.
Based on the DEA- DA analysis, 13 firms were on the
bankruptcy frontier and 87 firms were under the bankruptcy
frontier or away from the danger zone. Therefore, we can say
that two models had almost similar results in identification of
the number of the firms exposed to bankruptcy.
Moreover the study showed that based on the classification of
firms into two groups of default and Non- default firms, the
DEA-Discriminant Analysis model was 94%
accurate in predicting the bankrupt companies and 80%
accurate in predicting the successful companies while the
DEA-Additive model was 70% accurate in predicting the
bankrupt companies and 91% accurate in predicting the
successful companies.
Therefore, the DEA-DA model is more accurate than the
DEA- Additive for identifying the firms which are less likely
to be bankrupt too. Therefore, in total the DEA-DA model is
more accurate than the DEA- Additive for predicting the
bankruptcy risk and the third hypothesis of research is
is more accurate than the DEA-Additive model, and it is
preferred and it is proposed to use this model for bankruptcy
prediction and analyze of the listed companies.
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