Journal zyxwvutsrq oj Burincss zyxwvuts Finance zyxwvu @Accounting, 18(5), September 1991, zyxw 0306 686 zy X $2.50 zy ALTERNATIVE MODELS FOR ASSESSING THE FINANCIAL CONDITION OF BUSINESS IN GREECE PANAYIOTIS THEODOSSIOU* INTRODUCTION Failure prediction models have been used increasingly by practitioners in finance and accounting as early warning systems of potential business failures. Com- mercial banks and creditors have been using these models to assess the credit- worthiness of commercial customers. As part of their investment decisions, investors rely on these models to measure a firm's risk of insolvency. Business managers, on the other hand, may use these models to assess and manage the financial turnaround of distressed companies.' Numerous studies have been undertaken to develop such models for the United States, the United Kingdom, and other co~ntries.~ However, despite the importance of this topic, there have been few recent attempts to develop a model for Greece. Grammatikos and Gloubos (1984) provide some early evidence on predicting bankruptcies of Greek firms. They apply the statistical technique of linear discriminant analysis on a matched sample of 29 failed and 29 healthy firms during the period 1977-81. Due to lack of data, the model's predictive ability is tested only on the estimation sample (sample used to estimate the model). Their model has been able to reclassify correctly 93.1 percent of the failed firms and 89.7 percent of the healthy firms in their original groups using data at two years prior to failure. Gloubos and Grammatikos (1988) extend their earlier study using the statistical techniques of logit and probit as well as linear discriminant analysis. Their estimation sample consists of 30 pairs of failed and healthy firms collected from the period 1977-81 .' To evaluate the performance of their models, they also use a holdout sample consisting of 24 pairs of failed and healthy firms collected from the period 1982-85. They find that the correct classification rates of their models range between 83 and 97 percent in the estimation sample and between 60 and 87 percent in the holdout sample. Papoulias and Theodossiou (1987) analyze the socio-economicand financial factors that have contributed to the large number of post- 1980 business failures The author is Assistant Professor of Finance in the Department of Economics and Finance at Clarkson University, New York. He acknowledges the helpful suggestions and comments of Ron Anderson, Linda Edwards, Steve Lustgarden, Hany Markowitz, Salih Neftci, Stavms Thomadakis, Angelos Tsaklanganos, Alexander Woroniak and the anonymous referee. He would also like to thank Nikiforos Laopodis for his excellent research assistance. (Paper receivedJune 1989, revised December 1989) 697