ASSESSING POTENTIAL FINANCIAL PROBLEMS FOR FIRMS IN BRAZIL

This paper examines the recent business failure experience in Brazil and develops, tests, and analyzes a quantitative model for classifying and predicting serious financial problems of companies. It utilizes a bankruptcy classification model developed by Altman (1968) in order to classify Brazilian firms during the period 1973 to 1976. A sample of 23 serious–problem firms is compared with a slightly larger control sample of healthy firms. A four–variable model successfully classified 88 percent of the firms one year prior to serious problems and as much as 78 percent three years prior. The importance of models that highlight financial problems early enough to suggest remedial changes is apparent in Brazil. For example an equilibrium situation between the domestic private sector, multinationals and public–owned firms is more likely to continue if weaker domestic firms can be helped and preserved. The application of such models by financial institutions and for financial market analysis is comparable to that in the United States and other developed countries. Finally, the paper explores the application of such models in developing countries. © 1979, Academy of International Business.