Corporate Bankruptcy Prediction Model, a Special Focus on Listed Companies in Kenya
Round 1
Reviewer 1 Report
The paper has an interesting topic, as the problem of corporate bankruptcy prediction presents high interest for readers. The structure of the paper respects the requirements of an academic research article. The literature review provides sufficient background data to understand the latest developments in the field. The methodology is adequate for the topic. The data is sufficient, well analysed and verified to provide a correct model.The conclusions are supported by the results
Author Response
I would like to thank you for the encouraging comments. I have incorporated comments from the other reviewers. I look forward to publishing this article.
Reviewer 2 Report
The authors should consider the following improvements:
Title is too general compared to the study developed: a model for bankruptcy prediction using a sample of 64 listed Kenyan companies; English editing of the paper is poor and should be improved; The authors should pay attention to some assumptions, i.e. ”Bankruptcy prediction is a technique of forecasting and projecting on company financial distress of public firms”. The authors consider that private firms are excluded? In Introduction, the authors should highlight the aim of the paper, the contribution to the knowledge in the field. Also, they must mention the structure of the paper; Section Materials and Methods looks like an enumeration of studies, without a logic correlation between them, and with the rest of the paper; The authors should detach a section such as Literature review from the section Materials and Methods; Literature review for the aim of the paper should present: similar studies developed in Kenya in other countries, using similar methodology, similar variables; Results should be interpreted according to the results found in the literature studied.
Author Response
Title is too general compared to the study developed: a model for bankruptcy prediction using a sample of 64 listed Kenyan companies;
Response: The research has been contextualised to cover only listed companies in the Nairobi securities exchange. In Kenya there are 64 listed companies from different sectors which include Agricultural, Automobiles and accessories, Banking, Commercial and services, Construction and allied, Energy and petroleum, Insurance, Investment, Investment services, Manufacturing and allied, Telecommunication and technology, Real estate investment trust and Exchange-traded fund. Suggestions on how to make the topic-specific will be highly appreciated.
English editing of the paper is poor and should be improved;
Response: We have edited the document using Grammarly. Each of the authors has also gone through the report. There were a lot of grammatical errors, contextual spellings, sentence structure, style of writing and punctuation which has been addressed.
The authors should pay attention to some assumptions, i.e. ”Bankruptcy prediction is a technique of forecasting and projecting on company financial distress of public firms”. The authors consider that private firms are excluded?
Response: This was an oversight and an error that has been corrected. Listed companies in the Nairobi Securities Exchange come from both the private and public sector. Therefore it was not right to say that bankruptcy prediction is a technique of forecasting and projecting on company financial distress of public firms”.
In Introduction, the authors should highlight the aim of the paper, the contribution to the knowledge in the field. Also, they must mention the structure of the paper;
Response: The objective of the research has been addressed in the introduction. The research has highlighted the aim or objective of the study as “Accurate prediction of the financial performance of companies is of great importance to various stakeholders in making important and significant decisions concerning their relationship and engagement with companies” Further Suggestions on how to improve it further will be highly appreciated. The contribution and the structure of the paper were missing but have been captured based on these recommendations. “The remainder of this paper is organized as follows. Section 2 of this paper discusses the empirical orientation of the study based on other scholars. Section 3 on Data and methods gives a highlight of the data to be collected and the methods used in the study. The section also discusses the models of analysis that are used in the study. Section 4, reports the empirical Result and discussion inline with past literature. Section 5 provides conclusions deduced from the primary research findings”.
Section Materials and Methods looks like an enumeration of studies, without a logic correlation between them, and with the rest of the paper; The authors should detach a section such as Literature review from the section Materials and Methods; Literature review for the aim of the paper should present: similar studies developed in Kenya in other countries, using similar methodology, similar variables; Results should be interpreted according to the results found in the literature studied.
Response: the two areas have been separated based on the suggestions. More literature has been added. Studies conducted in Kenya have been added. They include studies by (Ouma & Kirori, 2019), Range, Njeru, & Waititu (2018), Kihooto, Omagwa, Wachira, & Ronald (2016), and Shisia, Sang, Waitindi, & Okibo (2014)
Author Response File: 
Author Response.docx
Reviewer 3 Report
The article is very interesting thematically, but the implementation of the topic is poor. In order to improve it, several comments should be taken into account:
1. Introduction is too long. It should include a clearly defined purpose of the article and possible research hypotheses. It should not be part of the literature review.
2. 11 pages occupy the Materials and Methods section. What is this? This is neither a literature review nor a description of the research methodology. These things should separate. Literature review and methodology should be separate parts. The review of world research is accurate here, but it should be remembered that this is not a theoretical but empirical publication.
3. Why was the logistic regression model used? Where's the justification?
4. On what basis were the explanatory variables chosen? In order to scrutinize the influence of chosen variables explanatory variable on the explained variable identifying the companies ’bankruptcy, a ranking analysis of predictors should be carried out (for example Gini coefficient or Cramer’s V).
5. Authors should examine several models and validate them.
6. The conclusions are only two sentences? Very in-depth research since the authors have so many summaries.
To sum up, the article is too theoretical and not practical enough.
Author Response
The article is very interesting thematically, but the implementation of the topic is poor. In order to improve it, several comments should be taken into account:
1. Introduction is too long. It should include a clearly defined purpose of the article and possible research hypotheses. It should not be part of the literature review.
Response: the introduction has been adjusted to 680 words. The purpose of the article has been included in the study, the study has research question inform of objective. The Research Hypothesis for the study include the following. I thought that they will be too many to be listed in the document.
Inventory turnover has no significant relationship with bankruptcy prediction Asset turnover has no significant relationship with bankruptcy prediction Debt equity ratio has no significant influence with bankruptcy prediction Debtors turnover has no significant relationship with bankruptcy prediction Total asset has no significant influence with bankruptcy prediction Debt ratio has no significant relationship with bankruptcy prediction Current ratio has no significant effect on bankruptcy prediction Working capital ratio has no significant influence on bankruptcy prediction
Should you feel that it is necessary to list all this in the main document they I will do that.
11 pages occupy the Materials and Methods section. What is this? This is neither a literature review nor a description of the research methodology. These things should separate. Literature review and methodology should be separate parts. The review of world research is accurate here, but it should be remembered that this is not a theoretical but empirical publication.
Response: I have separated the Literature Review and the methods part. Each section is standalone based on the recommendations of the second and the third reviewers.
Why was the logistic regression model used? Where's the justification?
Response: Logistic regression was very important in this study because the outcome variables in this study were dichotomy. The variables have a non-linear relationship which violates one of the assumptions of a linear regression. Logistic regression was also important because it helps in predicting the probabilities of predictor variables influencing the dependent variable.
On what basis were the explanatory variables chosen? In order to scrutinize the influence of chosen variables explanatory variable on the explained variable identifying the companies ’bankruptcy, a ranking analysis of predictors should be carried out (for example Gini coefficient or Cramer’s V).
Response: the explanatory variables were adopted from a number of studies. They were adopted from the studies that were used in the literature review. A diagnostic multi-collinearity was used to check on those variables that are highly correlated which can affect the logistic regression. This saw Quick ratio being excluded from the other variables.
Authors should examine several models and validate them.
Response: This study tested the following models, Ohlson’s model and a local (Grünberg’s), Altman’s Z score models for bankruptcy prediction. They have been validated as well.
The conclusions are only two sentences? Very in-depth research since the authors have so many summaries.
Response: The conclusion has been beefed up based on the recommendations
Author Response File: Author Response.docx
Round 2
Reviewer 2 Report
The authors improved the most part of the paper. The only recommendation that was not fulfilled is the one related to the interpretation of the final results according to the results of other authors cited in the Literature review, i.e. they should mention if their results are similar or not with other results published in the cited literature.
Author Response
The authors improved the most part of the paper. The only recommendation that was not fulfilled is the one related to the interpretation of the final results according to the results of other authors cited in the Literature review, i.e. they should mention if their results are similar or not with other results published in the cited literature.
Response: This was an oversight in the previous corrections. The findings have been interpreted based on other studies cited in the literature review. The corrections have been done as can be seen in the document.
Author Response File: Author Response.docx
Reviewer 3 Report
The article is still too theoretical. A possible analysis takes three pages. Instead of shortening, the Literature Review section was extended, which made the article even more theoretical. The research part should be strengthened and not vice versa.
Some suggestions were taken into account but this did not significantly improve the quality of the publication.
Author Response
The article is still too theoretical. A possible analysis takes three pages. Instead of shortening, the Literature Review section was extended, which made the article even more theoretical. The research part should be strengthened and not vice versa.
Some suggestions were taken into account but this did not significantly improve the quality of the publication.
Response: We resolved to include a canonical correlation matrix to make the paper more quantitative rather than qualitative, as was suggested. The research part has been strengthened also through discussions and integration with previous studies in chapter two. The conclusion has also been strengthened to support the paper.
The Literature review section was extended based on the recommendations from the second author who wanted to see the Kenyan context on bankruptcy prediction. I look forward to hearing from you.
Any more recommendations on how to improve the paper will be highly appreciated.
Author Response File: Author Response.docx
Round 3
Academic Editor Report
- The title must be changed. The novelty of this paper is that it refers to Kenya. In the current form, the title is too general. I suggest you change the title for "Corporate Bankruptcy Prediction - the Case of Kenya" or something like that.
- In the text of the article, you should underline what is new in this field of research (for example that research was done for Kenya conditions and in Kenya lacks such comprehensive researches).
- The introduction should include the following information: the aim of the paper, research questions or hypothesis, used methods and what is new in this article in comparison to the current literature. Now it lacks this information.
- Literature review is too long and chaotic. You should order it historically or take into account special topics such as techniques used to develop models, variables used in these models, etc. In addition, I suggest you order this information in the tables. I appreciate that you added information about researches done in Kenya.
- You presented model after classification table. In my opinion, it should be vice versa. Moreover, it is recommended to check the accuracy of the model on the basis of validation sample (not only on the basis of learning sample).
- In conclusions you should write what it could be done in the future researches, what are constraints and advantages of your research.
Author Response
- The title must be changed. The novelty of this paper is that it refers to Kenya. In the current form the title is too general. I suggest you change the title for "Corporate Bankruptcy Prediction - the Case of Kenya" or something like that.
Response: The topic has been modified to Corporate Bankruptcy Prediction Model, a Special Focus on Listed Companies in Kenya.
- In the text of the article, you should underline what is new in this field of research (for example that research was done for Kenya conditions and in Kenya lacks such comprehensive researches).
Response: This study sought to bring new knowledge in the field of financial economics by developing a current and operative model that can be able to be used by investors in making investment decisions in both private and public companies based on earning management. Recent cases have seen several listed companies going under with investors’ finances even after declaring huge annual dividends to shareholders. This research study sought to answer a number of research questions, what is the contribution of Debt Coverage ratios on bankruptcy prediction, how does Liquidity management ratios affect the financial performance of listed companies and lastly, how activity ratios contribute to corporate earnings management concerning financial performance. The study conducted a trend analysis using canonical correlation and logistical regression model to determine relationships among various variables.
- The introduction should include the following information: the aim of paper, research questions or hypothesis, used methods and what is new in this article in comparison to the current literature. Now it lacks these information.
Response: this section has been introduced in the introduction to capture the specific recommendations by the researcher. In many instances, policyholders have a habit of thinking that large companies are financially stable and that they are solvency guaranteed, which is not the case always. In assessing the creditworthiness of companies, the various actors use solvency adequacy ratio indicators. In most companies, the companies have a given solvency adequacy ratio used as a yardstick for measuring performance, which is required to be made public. One of the questions that stakeholders ask themselves is whether the indicator is reliable for policyholders to forecast the solvency of a company using the current information. This article, therefore, attempts to evaluate different bankruptcy prediction models that have been used in different countries over time. Several studies have been conducted in Kenya concerning bankruptcy prediction with most studies trying to validate the Altman’s Z-score developed in 1968 in projecting for corporate bankruptcy. None of the studies came up with a model that applies to listed companies in Kenya to determine the financial viability to make investment decisions. This study sought to bring new knowledge in the field of financial economics by developing a current and operative model that can be able to be used by investors in making investment decisions in both private and public companies based on earning management. Recent cases have seen several listed companies going under with investor’s finances even after declaring huge annual dividends to shareholders. This research study sought to answer a number of research questions, what is the contribution of Debt Coverage ratios on bankruptcy prediction, how does Liquidity management ratios affect the financial performance of listed companies and lastly, how activity ratios contribute to corporate earnings management concerning financial performance. The study conducted a trend analysis using canonical correlation and logistical regression model to determine relationships among various variables.
- Literature review is too long and chaotic. You should order it historically or take into account special topics such as techniques used to develop models, variables used in these models, etc. In addition, I suggest you order this information in the tables. I appreciate that you added information about researches done in Kenya.
Response: I have arranged the literature historically, broken down the literature into three subsections as can be seen in the document. Also, I have omitted some literature to reduce the length of the literature section.
- You presented the model after classification table. In my opinion, it should be vice versa. Moreover, it is recommended to check the accuracy of the model on the basis of validation sample (not only on the basis of learning sample).
Response: this has been reworked on based on the recommendation. The model accuracy has also been validated.
- In conclusions, you should write what could be done in future researches, what are the constraints and advantages of your research.
Response: The advantage of the research is captured under the significance of the research as well as the contribution of the research.
Author Response File: Author Response.docx
