Title: Entrepreneurship insolvency risk management: a case of Latvia

Authors: Irina Genriha, Gaida Pettere, Irina Voronova

Addresses: Faculty of Economics and Management, University of Latvia, 5 Aspazijas StrRiga, LV 1050, Latvia. ' Department of Engineering Mathematics, Riga Technical University, 1 Kalku Str., Riga, LV 1658, Latvia. ' Faculty of Engineering Economics and Management, Riga Technical University, 1 Kalku Str., Riga, LV 1658, Latvia

Abstract: Financial crisis and its consequences are visible in the capital adequacy of many commercial banks, which indicates that the approach banks took to assess credit risk was not sufficiently sophisticated. This article discusses practical methods of insolvency risk modelling for enterprises. In this paper, the authors analysed the accuracy of ten models developed by foreign authors to assess insolvency risk, which were validated on the database of Latvian companies. The authors have shown that models developed on historical data for foreign companies are less accurate than the model developed on the basis of financial indicators of Latvian companies. The authors developed a three-factor model that estimates probability of default of Latvian enterprises based on historical data for 1,272 enterprises using binary logistic regression analysis.

Keywords: entrepreneurship insolvency; probability; default; risk management; logit model; logistic regression analysis; E. Altman model; scoring models; ROC curve; model accuracy; Latvian enterprises; Latvia; risk modelling; insolvency risks.

DOI: 10.1504/IJBAAF.2011.039370

International Journal of Banking, Accounting and Finance, 2011 Vol.3 No.1, pp.31 - 46

Published online: 31 Mar 2011 *

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