Effect of Bankruptcy Prediction Using Ohlson Score Model on Stock Returns

This study investigates the impact of Ohlson Score model on stock returns in textile and garment companies listed in IDX for the years 2010-2014. The study analyzes the data using panel data regression and Mann Whitney test. The results indicate a negative influence of Ohlson Score on stock returns, although the effect is not significant.

International Journal of Science and Research (IJSR)
ISSN (Online): 2319-7064
Index Copernicus Value (2013): 6.14 | Impact Factor (2014): 5.611
Volume 4 Issue 12, December 2015
www.ijsr.net
Licensed Under Creative Commons Attribution CC BY
The Effect of Bankruptcy Prediction Using Ohlson
Score Model Towards Stock Returns (Study in
Textile and Garment Company Listed in IDX For
Year 2010-2014)
Ayu Putri Wulandari1, Norita2, Aldilla Iradianty3
Abstract: The deceleration of Indonesian economics growth seen by the slowdown of GDP’s growth has brought a lot of impact in
various sector of Industry. One of them are manufacturing Industry, particulary in Textile and Garment industry. It can be seen from
the decline of manufacturing company’s growth which reached -1,98% in the second quarter of 2015, and also the decline of the textile
products export trend, as well as a number of textile and garment companies which went bankrupt. Those condition which affect textile
and garment companies are the symptomps of impending Financial Distress which is the beginning of Bankruptcy. Bankruptcy can be
early predicted by various methods, one of them is Ohlson Score (1980). Besides bankruptcy prediction, another important thing which
should be known is investor welfare, which is reflected from stock return. This is the main question of the research, that is how far could
Ohlson Score influences stock return. The statistical analysis techniques used are panel data regression method, and Mann Whitney test.
This study consists of 7 companies. The result shows that there is a negative influence between ohlson score towards stock return, but
not significantly.
Keyword: Financial Distress, Bankruptcy, Ohlson Score, Stock Return
1. Introduction
The existence of the industry in a country can be affected
by various factors, one of themis external environment ,
especially economic factors. Each year, Indonesia suffered
economic events, which affect global and regional
economic situation. According to the Central Bureau of
Statistics [1], Indonesia has affected a situasion called
economic deceleration. Indonesia's economic deceleration
began to seen in 2014 that continues to touch the figure of
the second quarter to 4.67%. Beside those condition, other
policy issues Indonesia experienced is the rising price of
fuel oil (BBM). These condition and economic policies
above have brought changes in conditions of various
industrial sectors in Indonesia, one of them is the declining
in manufacturing sector, particularly the Textile and
Garment company. Economic deceleration also impact the
export declining of textile products that fall to 1.09%.
Other events can be highlighted in the textile and garment
companies are delisting, Delisting is the issuer of the stock
exchange. Delisting incident ever affected a Sector Textile
and Garment company, as quoted in the Kontan
Newspaper [2] on March 16, 2013 thatPanasia Filamen
Inti Tbk (PAFI)delisted because it does not improve the
financial performance and do not have a clear business
plan.
Those events that affected textile and garment industry
have abig potential for the occurrence of Financial
Distress. According to Black's Law Dictionary in Rodoni
and Ali [3] that the financal distress is the deterioration of
the company's previous condition. The occurrence of
Financial Distress in a company can be predicted by
analyzing the company's financial statements. In addition
to performing a simple ratio analysis, there are several
models for mempredisikan Financial Distress of a
company, including Altman Z-Score, Springate,
Zmijewski, and Ohlson Score. Compared with other
methods, Ohlson method is a method that not only involve
the financial ratio only, but involve elements of inflation,
which is reflected in the formula Size, which is the logit of
the total assets divided by GNP-price index level. This
study also applies atrends straight line forecasting
methods, with the smallest quadrant models. These
decision made beacuse the Central Bureau of Statistics has
not released any real GNP Indonesia in 2014.
For public companies, the stock is a main source of
corporate funding. The presence of the stock price may
reflect a general picture of a company. Stock prices tend to
fall in a relatively long period of time, can give an
indication to investors that the company is in a poor and
unhealthy condition. Conversely, if the stock price tends to
rise, it will indicate the condition of the company is good
and healthy. Besides considering the stock price, the main
purpose of an investor to buy stocks is to gain some return,
one of which is in the form of stock returns.
Return is the main investor’s motivation and consideration
in selecting a stock, maximizing investor return is the main
goal in investing. Tandelilin [4] reveals the sources of
return consists of two main components, namely yield and
capital gain (loss).This study emphasizes on several
things,those are the corporate bankruptcy prediction using
Ohlson Score models, The Influence between Ohlson
Score towards stock returns, and the difference between
stock return in failed and non failed company.
2. Literature Survey
2.1 Financial Performace
Evaluating company's financial performance is one of
many tool to determine the quality of the company. By
evaluating the financial performance, company will
Paper ID: NOV152403 1853

International Journal of Science and Research (IJSR)
ISSN (Online): 2319-7064
Index Copernicus Value (2013): 6.14 | Impact Factor (2014): 5.611
Volume 4 Issue 12, December 2015
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determine its deficiency, so it could be fixed as soon as
possible.
Financial performance also has a close relation with the
financial management, where its the one of financial
management activity. Like Keown [5] describes "Financial
management concerned with the maintenance and creation
of economic value or wealth. Consequently, this course
focuses on decision making with an eye toward creating
wealth.... "
One of the main sources about company's financial
performance is by observing and analyzing financial
statements. This was revealed by Keown, et al [5] "... by
looking at the basic financial statements that are a primary
source of information about a firm's financial
performance"
2.2 Financial Statement
The company financial statements is a sheet that provides
information on some of the company's business activities,
including financing, investing,and operating activities.
These statement reflectes by some statements about
financial statement definition. There are several definitions
of financial statement. One of them was stated by Titman
[6] that A Firm’s statements provide a visual
representation of the firm that is used to describe the
business to investors and other outside of the firm as well
as to form employee”. Another statement came form
Kamaludin [7] whom states that "The financial statements
are the final result of a recording process which is a
summary of financial transaction that occured during the
financial year concerned"
According to Rodoni and Ali [3] , the financial statements
is a report published by a compant for its shareholders.
This report contains the basic of financial statements, and
also the management's analysis about former operating
activites, and opinion about company;s prospects for the
future.
2.3 Financial Statement Analysis
According to Subramanyam and Wild [8] Financial
statement analysis is the application of tools and analytical
techniques for financial statement general purposes, and
the related data which generate useful estimatation and
conclusions in business analysis.
Subramanyam and Wild [8] explained that the analysis of
financial statements are an integral important part of the
wider business analysis. Described in the same book that
analyzes the business (business analysis) is the process of
evaluating the economic outlook and the risk of the
company. It includes an analysis of the company's business
environment. , as well as the financial position and
performance
2.4 Financial Distress
Financial distress is one of the company's condition which
can be detected by the analysis of financial statements.
This company's condition can be a sign of impending a
worse situation, which is bankruptcy. Companies should
aware of the coming of financial distress, so that does not
lead to a worse stage.
There are several definitions of financial distress, as
described by Black Law's Dictionary in Rodoni and Ali [3]
that the Financial distress is defined as an insolvency, the
condition of assets or property and obligations of a person
who was formerly available to be not enough to pay off the
debt.
Tirapat and Nittayagasetawat (1999) in Rodoni and Ali [3]
defines financial distress as the company which terminated
its operations by the authority of the government and the
company is required to carry out the restructuring plan.
2.5 Bankruptcy
Bankruptcy is one of many things that is avoided by any
company. Knowing the bankruptcy possibility is one of the
financial statement analysis's objective. By knowing the
bankruptcy possibility, the company can make long-term
plans, and anticipate to avoid the situation
Commonly, bankruptcy can occur because companies can
not afford to pay the debt. As stated Gitman (1996) in
Karamzadeh [9] that bankruptcy is a legal status that
applies to the bankruptiest, the parties are not able to pay
their debts to creditors. Commonly, bankruptcy decided by
the courts many by the debtor, that is, when the amount of
debt the company is higher than total assets.
Goudie (1987) in Karamzadeh [9] revealed there are some
things that can lead to bankruptcy, such as
mismanagement, economic events, the government's
decision, as well as natural events and accidents.
2.6 Ohlson Score
Ohlson Score discovered by James Ohlson in 1980. In the
early discoveries time, Ohlson dubious Multiple
Discriminant Analysis (MDA) method founded by Altman
(1968). As his equal, O-score using logistic regression in
its calculations.According Ghozali [10] "Logistic
regression is actually similar to discriminant analysis that
we want to test whether the probability of occurrence of
the dependent variable can be predicted by the
independent variables". The formula of Ohlson Score is:
O-Score = -1,32 – 0,407(Size) + 6,03 ( ) -1,43 ( ) +
0,0757 ( ) – 2,37 ( ) – 1,83 ( ) + 0,285 (INTWO)
– 1,72 (OENEG) -0,521 (1)
Description:
a. Size = log(total assets/GNP price-level index)
b. TLTA = Total liabilities/Total Asset
c. WCTA = Working Capital/Total Assets
Paper ID: NOV152403 1854

International Journal of Science and Research (IJSR)
ISSN (Online): 2319-7064
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d. CLCA = Current Liabilities/Current assets
e. OENEG = One if total liabilities exceeds total assets,
zero otherwise
f. NITA = Net Income/Total Assets
g. FUTL = Funds provided by operation divided by total
liabilities
h. INTWO = One if net income was negative for the last
two years, zero otherwise
i. CHIN = ( - )/(| | + | |)
The result of Ohlson Score calculation above can be
categorized by two, such as Failed and Non-Failed:
Table 1: Bankruptcy Probability’s Criteria
Probability or P(O-score) Category
O-Score > 0,038 Failed
O-Score < 0,038 Non-Failed
Source: Ohlson [11]
2.5. Investment
Tandelilin [4] revealed that investment is a commitment of
a number of funds or other resources were done at this
time, with the purpose that to get some number of
advantages in the future. An opinion about the definition
of investment also disclosed by Relly and Brown (2009) in
Fahmi [12] "Investment is the current commitment of
dollars for a period of time to derive future payments that
will compensate the investor for (1) the time the funds are
commited. (2) the expected rate of inflation, (3) the
uncertainty of the future payments. "
While Herlianto [13] stated that the investment is basically
the placement of the funds at this time in order to gain
some advantage in the future.
According Tandelilin [4] if it is associated with a variety
of activities, types of investment can be divided into two,
such as: Real Investment and Financial Investment.
2.7 Stock Return
Return in investment can be either a profit or a loss.
According Tandelilin [4] There are two components of
total return on investment. First, any cash received when it
has investments. For shares, a cash payment from the
company to the shareholders is called dividend. Second,
the value of the assets purchased may change, which
means that is a capital gain or capital loss. For stocks, the
price can be increased so that the holder is said to derive
capital gains or can also be decreased called a capital loss.
Because the source of the return comes from dividends and
capital gains / capital loss, the calculation of return can be
started by calculating the dividend the company, and
continued to calculate the capital gain or capital loss.
Dividen Yield = (2)
Capital Gains = (3)
Description:
Dt: Dividend beginning of year t
Pt: The stock price per share at the end of the year
: The stock price per share at the beginning of the year
3. Problem Definiton
Based on the background and theoritical framework, the
problem definition in this research can be formulated as
follows:
1. How does bankruptcy prediction using O-Score on the
company Textile and Garment company listed in
Indonesia Stock Exchange for year 2010-2014?
2. How is the movement of stock returns Textile and
Garment company listed in Indonesia Stock Exchange in
2010-2014?
3. How is the condition of stock returns in company
indicated failed?
4. How is the condition of stock returns in company
indicated non failed?
5. Is there any stock returns's difference in company
indicated failed and non failed?
6. How does the O-Score effect towards stock returns
Textile and Garment company listed in Indonesia Stock
Exchange in 2010-2014?
4. Methodology or Approach
This study uses quantitative methods, and the type is
causal research. Type of scale used in this study is a ratio
scale. According Sedarmayanti [14] The scale of numbers
in a scalar ratio is the ratio of the absolute number at zero
point. The population in this study are all textile and
garment company listed on the Indonesia Stock Exchange
until 2014. The total population is 18 companies.
Populations are then selected by purposive sampling
technique, and obtained 7 samples of the company, namely
Polychem Indonesia Tbk, Argo Pantes Tbk, Apac Citra
Tbk Centertex, Pan Brothers Tbk, Asia Pacific Fiber Tbk,
Nusantara Inti Corpora Tbk, and Unitex Tbk. Authors
obtain research data from the official website of Indonesia
Stock Exchange (idx.co.id), and stock price history from
Yahoo Finance official website.
To answer the problem definition, there are several tests
and statistical analysis used. The first is descriptive
analysis, to describe the condition of the stock return. Then
proceed with the Kolmogorov-Smirnov test, which is a test
for normality before continue to Mann Whitney Test. Next
one is a different test Mann Whitney, the different test that
can be done in the absence of normality. Then, regression
panel data, regression model used in this research is panel
data regression model. According Rosadi [15] Data panel
is a combination of a time-cross (cross section) and time
series data type, the number of observed variables or the
number of categories and collected within a certain period.
While the model used so-called panel data model. Before
performing regression panel data, researchers conducted a
test panel data model first, namely Test Chow / Likehood
and Lagrange Multiplier Test.
Paper ID: NOV152403 1855

International Journal of Science and Research (IJSR)
ISSN (Online): 2319-7064
Index Copernicus Value (2013): 6.14 | Impact Factor (2014): 5.611
Volume 4 Issue 12, December 2015
www.ijsr.net
Licensed Under Creative Commons Attribution CC BY
5. Result / Discussion
5.1 Banktuptcy Prediction
Based on Ohlson Score calculation, showed that from
overall 35 calculation, which consists of 7 companies and
5 period (2010-2014). 22, og those of that identified
Failed, while 13 others identified Non failed. Polychem
Indonesia Tbk has different conditions in every year. In
2010 these company identified Failed, but two subsequent
period the condition of the company changed to Non
Failed. In 2013 the condition of the company changes
again to Failed, and ends with Non Failed in 2014. While
the company Argo Pantes Tbk, Apac Citra Tbk Centertex,
Unitex Tbk, and Asia Pasicif Fiber Tbk identified Failed
for 5 consecutive years. Two others, namely Pan Brothers
Tbk, and Nusantara Inti Corpora Tbk, identified Non
Failed for 5 consecutive years.
5.2 Descriptive Analysis of Stock Return
Based on descriptive analysis between the Failed an Non
Failed company . There are some differences between
them. Such differences are outlined in Table 2:
Tabel 2: The Ohlson Score’s Comparison in Failed and
Non Failed Company
Company’s Category
Failed Non Failed
Mean 0,184136 Mean 1,099077
Median 0,000000 Median 0,000000
Max 2,309000 Max 12,79400
Min -0,580000 Min -0,702000
Sum 4,051000 Sum 14,28800
Std. Dev 0,590857 Std. Dev 3,581412
Skew 2,304475 Skew 2,973632
Kurt 8,943273 Kurt 10,28603
Observation 22 Observation 13
The average of stock returns of Non Failed category has a
higher nominal, that 1.099077 or 1.0, compared to Failed
companies, 0.18. The highest value of stock returns are
also still occupied by the Non Failed company, which
amounted to 12.79 or 1279%. Compared with stock
returns Failed company ie 2.31 or 231%. However, the
company categorized Failed has the lowest value smaller
than the companies categorized as Non-Failed which
amounted to -0.70 or -70%, while the category Failed
company has a minimum value of -0.58 or -58%. Overall
stock returns Failed category is 4.05 or 405%, and the
company categorized Non Failed 14.29 or 1429%.
5.2 Mann Whitney Test
Based on the Mann Whitney test, obtained the test results
in Table 3.
Table 3: Mann Whitney Test
Test Statisticsb
return
Mann-Whitney U 131.500
Wilcoxon W 384.500
Z -.394
Asymp. Sig. (2-tailed) .694
Exact Sig. [2*(1-tailed Sig.)] .699a
a. Not corrected for ties.
b. Grouping Variable: kategori perusahaan
Based on the results of Mann Whitney test, a score P-value
(Asymp. Sig 2-tailed) of 0.694, where the the P-value is
greater than 0,025. According to the test criteria, when the
P value (Asymp. Sig. 2-tailed)> 0.025, then Ho is
accepted. So there is no difference in the value of company
stock returns in failed and non failed company.
5.3 T-Test and Data Panel Regression
The t-test was conducted to determine the relationship O-
score bankruptcy prediction on stock returns. The t-test is
a procedure in which the sample results can be used to
verify or disprove the null hypothesis (Ho). The results of
the t test performed with panel data regression model with
Common Effect, panel data regression results described in
the table
Tabel 4: T-Test
Dependent Variable: RETURN
Method: Panel Least Squares
Date: 11/25/15 Time: 18:26
Sample: 2010 2014
Periods included: 5
Cross-sections included: 7
Total panel (balanced) observations: 35
Variable Coefficient Std. Error t-Statistic Prob.
C 0.687733 0.433538 1.586325 0.1222
SCORE -0.035047 0.045411 -0.771774 0.4457
Based on panel data regression that has been done, the p-
value obtained from Ohlson Score of 0.4457, where it’s
greater than α = 0.05. According to decision criteria, if the
p-value> α, then Ho is accepted. So it can be concluded
that there is no significant effect between the O-Score
bankruptcy prediction towards return stock with a
coefficient of -0.035047 Ohlson Score, which means the
event of changes Ohlson Score rise by 1%, then the return
of the company's shares will be decreased by 0.035047 %.
In other words, the higher the Ohlson Score, the lower the
stock return. Coefficient of Determination aims to
determine how far the model explains the dependent
variable. The coefficient of determination is based on
panel data regression that has been done is amounted to
0.017730. From these figures we can conclude that the
variable Ohlson Score, can explain the variable of 1.773%
Stock Return.
Paper ID: NOV152403 1856

International Journal of Science and Research (IJSR)
ISSN (Online): 2319-7064
Index Copernicus Value (2013): 6.14 | Impact Factor (2014): 5.611
Volume 4 Issue 12, December 2015
www.ijsr.net
Licensed Under Creative Commons Attribution CC BY
6. Conclusion
Based on the analysis above it can be concluded that of all
35 calculation, which consists of seven companies, in
which each company is divided into five periods (2010-
2014), there are 22 calculations indicated Failed company,
and 13 as Non Failed company. Based on descriptive
analysis there are differences in the average and the
number of stock returns failed and non-failed, but by
Mann Whitney test, proved that there is no difference
between the value of company stock returns failed and non
failed.
From the results of this study can also be concluded that
there is no significant influence between the O-Score
bankruptcy prediction on stock returns, with a coefficient
of Ohlson Score of -0.03547 and determination coefficient
of .017730, or 1.773%, which means if there is an increase
of Ohlson Score 1%, then the return of the company's
shares will be decreased by 0.035047%. In other words,
the higher the Ohlson Score, the lower the stock return.
7. Future Scope
For further research that will predict Ohlson Score, it is
advisable to use real GNP in 2014 with the data that were
not foreseen, as well as the views of the value of R-
Squared are very small, namely 1.773%, further research
can could input other variables that are expected to have
high influence on the stock returns, mainly from external
factors, such as the macroeconomic situation, the political
situation, natural conditions, government regulations, or
inside either outside nation issues.
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Author Profile
Name Ayu Putri Wulandari
Date Of Birth November, 21st 1994
Education SMP N 1 Kuta Utara
SMK N 1 Denpasar
Telkom University, Bandung
Interest in Financial Management.
E-mail [e-mail]
Phone Number [phone]
Occupation Entrepreneur, Fresh graduate
Name Dr. Norita, SE., M.Si., Ak.,
CA
Date Of Birth May, 22nd, 1961
Education Andalas University, Padang
(S1)
Padjadjaran University
Bandung (S2)
Padjadjaran University
Bandung (S3)
E-mail [e-mail]
Phone Number 081320454655
Occupation Lecturer
JOURNAL OR PROCEEDINGS
No Year Title Journal
1 2012
Intellectual Capital: Concepts,
Models and Applications (Studies
in Banking Sector Listed in
Indonesia Stock Exchange Period
2007-2010)
SNAB
2 2013
Comparative Analysis On
Corporate Condition Using Z”-
Score Value On
Telecommunication Sector and
“Gray” Zone Trend Determination
For The Year 2013
ICOI
Paper ID: NOV152403 1857

International Journal of Science and Research (IJSR)
ISSN (Online): 2319-7064
Index Copernicus Value (2013): 6.14 | Impact Factor (2014): 5.611
Volume 4 Issue 12, December 2015
www.ijsr.net
Licensed Under Creative Commons Attribution CC BY
3 2013
Comparative Analysis on Stock
Intrinsic Value with Estimation of
Stock Value and Stock Market
Value For Decision Making “Buy,
Sell, or Hold” In
Telecommunication Sector at
Quarter I of 2013
ISCLO
4 2014
Analysis and Forecasting of
Bankruptcy Potential Using
Multiple Discriminant Analysis and
Double Moving Average on PT.
Bakrie Telecom, Tbk Year 2013
ICOI
5 2014
IDENTIFICATION OF FACTORS
THAT CONTRIBUTE TO
CAPITAL STRUCTURE YEAR
2009-2012 (CASE STUDY IN
FOREIGN EXCHANGE BANKS
IN INDONESIA)
GTAR
6 2015
An Analysis of Telecommunication
Vendor Company Bankruptcy
Potency Based on the Problematic
Financial Ratio with Altman,
Springate and Zmijewski Methods
ICOI
Name Aldilla Iradianty, S.E, M.M
Date Of Birth June 30th,1987
Education Parahyangan University
Bandung, Indonesia
Magister Management,
majoring in Strategic
Management
2005 – 2009 Padjajaran
University Bandung, Indonesia
Economic Faculty, majoring in
Finance Management
E-mail [e-mail]
Phone Number 0821 2630 5599
Occupation Lecturer
Paper ID: NOV152403 1858