Laitinen, Erkki K., Martti Luoma and Seppo Pynnonen. (1996). Bankruptcy risk as a signal to reorganization of a company. Proceedings of the University of Vaasa, Discussion papers 200.

Abstract
The purpose of this study is to develop a method, based on the bankruptcy risk, to measure the viability of a company in the sense of identifying a posasible need for reorganization. The companies are on theoretical grounds classified into four classes (liquidable bankrupt firms, reorganizable bankrupt firms, reorganizable nonbankrupt firms, and healthy bankrupt firms). The empirical method proposed is based on a specific fuzzy clustering method to identify the four classes and on a canonical discriminant analysis to classify a firm between the classes. The system of canonical discriminators is estimated in data including 40 Finnish bankrupt companies and their nonbankrupt mates, and tested in data including 37 bankrupt firms and their mates. The empirical findings are encouraging. Especially, the second discriminant function is of interest. The function separates the grey area, resulted from the classification based on the scores of the first function, into two groups, i.e. reorganizable bankrupt firms and reorganizable nonbankrupt firms. In summary, the system of three canonical discriminators may be useful in practice when evaluating the viability of business firms.