Abstract:
The purpose of this research is to develop a model to
predict corporate failure of listed companies in Sri Lanka. This
study utilized publicly available data from annual repots of a
sample of 70 failed firms and a sample of matched 70 non failed
firms listed on Colombo stock market for a period covering the
2002 to 2008 financial years with logistic regression analysis. A
total of seven corporate governance variables were used as
predictor variables of corporate failure.
Analysis of the statistical testing results indicated that Model
consists with corporate governance variables improved the
prediction accuracy to reach 82.86% one year prior to failure.
Furthermore, predictive accuracy of the Model in all three years
prior to failure is above 73%. Hence model is robust in obtaining
accurate results for up to three years prior to failure. Final model
includes four corporate governance variables, outside director
ratio, CEO duality, remuneration of board of directors and
company audit committee. These variables are having more
explanatory power to predict corporate failure.
Therefore, model developed in this study can assist investors,
managers, shareholders, financial institutions, auditors and
regulatory agents in Sri Lanka to forecast corporate failure of
listed companies.
