Abstract
This study explains bankruptcy by talking about risk, risk types, and risk management and bankruptcy forecasting models. The studies in the literature are examined and explained as risk, danger, possibility of bad consequences, loss, or misfortune. Types of risks, purchasing power, interest rate, market, political, exchange rate, financial, industry, corporate bond, liquidity, taxation, reinvestment, country, dynamic, structural, conditional, customer, financial/regulatory, reputation/loss, corporate and interpretation risks are identified in the literature. The study explains bankruptcy as the situation that occurs when a business cannot obtain sufficient value to cover the costs of doing business. Finally, it is stated in this study that bankruptcy estimation methods, which are constructed with historical observations and evaluated with historical observations, are used to predict firms without failing. The findings, which are obtained by examining the literature, offer important contributions to company managers.
TopIntroduction
Today, with the increasing rate of change, the increase in customer demands and the globalization of the markets further increase the importance of risk management in enterprises and this situation emphasizes that enterprises must have a comprehensive risk management strategy in order to survive in the market and gain competitive advantage. Therefore, risk management is one of the important phenomena facing businesses and other institutions, and even cases such as Barings and Railtrack in the UK and Enron, Adelphia in the US and Worldcom and Parmalat show the consequences of not managing risk correctly (Merna & Al-Thani, 2008). Hence, the aim of this study is to explain bankruptcy by talking about risk management and to talk about bankruptcy forecasting models. In this study is explained by examining and evaluating the studies in the literature.
The word risk is used synonymously with the word uncertainty. Uncertainty is a state of mind characterized by suspicion or a conscious lack of knowledge about the outcome of an event. In other words, uncertainty involves subjective possibilities. However, risk encompasses objective probabilities (Head, 1967). The word risk is the French origin word 'risqu'e and the main word is “riziko” (Özbilgin, 2012). The etymological origin of the word risk is based on the Latin word “risicum” (Çıtak, 1999). According to the Oxford English Dictionary Council, risk is explained as danger, the possibility of bad outcomes, loss or exposure to misfortune (McNeil, 2005). The situation in which objective evaluations can be made about what the results of an investment decision may be in an environment of uncertainty (Çıtak, 1999) or the degree of uncertainty in winning or losing is called risk (Aksoy & Tanrıöven, 2014). From a financial perspective, risk is any event or action that can adversely affect an organization's ability to achieve its goals and implement its strategies (McNeil, 2005). In technical terms, risk is expressed as the distribution of probability values for returns around the average value. In terms of investment analysis, risk is defined as negative deviations in the expected return of financial investment (Çıtak, 1999). At the same time, risk consists of four basic parameters. The first is the varying probability and the probability of occurrence involving low/high frequency, the second is the severity of the impact, which includes the threat potential and continuous variability in terms of cost & time, the third is the sensitivity to change or external influences with opportunities and positive/negative consequences, and the last is the degree of interdependence with other risk factors (Merna & Al-Thani, 2008).
In addition, risks are divided into many varieties. Çıtak (1999) risks; the researcher distinguishes it as systematic risks consisting of purchasing power, interest rate, market and political risks and non-systematic risks consisting of financial, business, management, non-repayment and marketability risks. Similarly, Aksoy and Tanrıöven (2014) describe systematic risks such as purchasing power, interest rate, market, political and exchange rate risks and non-systematic risks financial, industrial and management risks. Merna and Al-Thani (2008) explain financial risks including structural delay, exchange rate, interest rate, equity, corporate bond, liquidity, taxation, reinvestment, country risks and non-financial risks including dynamic, structural, conditional, customer, financial/regulator, reputation/loss, corporate and interpretation risks. Hull (2018) and Guégan and Hassani (2019) also mention that there are types of risk such as credit risk, market risk and operational risk.
Key Terms in this Chapter
Risk: It is used synonymously with the word uncertainty.
Bankruptcy: It is a forced liquidation procedure of all the assets of the debtor, which is carried out by the bankruptcy bodies for the purpose of collecting the receivables of the creditors.
Risk Management: It is the discipline to live with the possibility of future events having adverse effects.
Risk Types: Risks are divided into many varieties. These are interest rate risk, market risk, political risk, financial risk, business risk, management risk, non-repayment risk, marketability risk, purchasing power risk, interest rate risk, exchange rate risk, structural delay risk, equity risk, corporate bond risk, liquidity risk, taxation risk, reinvestment risk, country risk, dynamic risk, structural risk, conditional risk, customer risk and interpretation risks.
Bankruptcy Estimation Methods: These are fuzzy cluster theory, neural networks, decision trees, rough cluster theory, case-based reasoning, support vector machines, data envelopment analysis, soft computing, statistical techniques such as linear discriminant analysis (LDA), multivariate discriminant analysis (MDA), quadratic discriminant analysis (QDA), logit and factor analysis.