Predicting Insolvency : A comparison between discriminant analysis and logistic regression using principal components

Sammanfattning: In this study, we compare the two statistical techniques logistic regression and discriminant analysis to see how well they classify companies based on clusters – made from the solvency ratio ­– using principal components as independent variables. The principal components are made with different financial ratios. We use cluster analysis to find groups with low, medium and high solvency ratio of 1200 different companies found on the NASDAQ stock market and use this as an apriori definition of risk. The results shows that the logistic regression outperforms the discriminant analysis in classifying all of the groups except for the middle one. We conclude that this is in line with previous studies.