The business economic model and legal issues related to financial distress company, The Singaporean Experience

Abstract

Financial ratios have long been utilized as indicators of important financials status of businesses. Analysts have developed business failure indicators using financial ratios. Anyhow, only few failure identification analyses on Asian firms have been recorded, especially Singaporean companies. The ultimate target of this research is to generate a finding that can discriminate between failed and non-failed companies. Additionally, this research analyzed the distributional properties of the financials ratios of failed and nonfailed listed companies. One -to-one method was utilized, with referred to 17 failed and non-failed companies for the period from 1983 to 2000. Utilizing the appropriate statistical test, it was determined, that only three financial ratios were normally distributed and two financial ratios nearly normal. One financial ratio was determined to be nearly square normal, three financial ratios were square roof normal and eight financials ratios were nearly square foot normal. Also, six financials ratios were lognormal and three financials ratios were nearly lognormal. Only one financial ratio was inverse normal and one nearly inverse normal. It is determined that the log transformation method was the most effective process and the square transformation method was the least effective to transform non-normally distributed information to the normal distribution. Anyhow, it is also determined that the equality of variance covariance of the failed and non-failed companies was not found. The effect of this inconstancy was least on the categorization factuality. Subsequent to the assumptions if discriminant test qualification, stepwise multiple discriminat testing was utilized to generate failure identification. The result correctly categorized 82.1 percent and 81.6 percent of the original sample and cross validated utilizing leave-one-out method or U-method. The two selected variables in the final outcomes were good indicators for businesses. Finding from this study, the business economic model has been developed which have three categories of company's financial status has been identified. Both financial statuses are solvent, grey-area and insolvent, each of this financial status had the effect to the company in term of legislation. Grey-area and insolvent categories are situation where the company must take rehabilitation steps permitted by the Malaysian Companies Act I 965 (Singaporean Companies Act, Chapter 50). Conclusion, from this study one model has been developed which can give financial status indicators to the companies in Singapore based on two variables. Hoping with this business economic model will give positive impact to both countries, Malaysia and Singapore in economic developing and bilateral trade in future.