TASK 1 - Bankruptcy data

The data set contains profitability, leverage, and bankruptcy indicators for 84 US companies, 42 of which filed for Chapter 11 bankruptcy in 2001?2002 after the stock market crash in 2000. The bankrupt companies were matched with 42 surviving companies with the closest capitalisation and the same US industry classification codes.

The information for each company was collected from the annual reports for 1998?1999, i.e. 3 years prior to the defaults of the bankrupt companies. The data set contains profitability and leverage ratios calculated as the ratio of net income (NI) and total assets (TA) and the ratio of total liabilities (TL) and total assets (TA). Profitability and leverage ratios are considered as numerical variables, the bankruptcy status in 2001 is a categorical variable with levels 1 (the company filed for Chapter 11) and -1 (the company survived the market crash).

summary(bankruptcy)

##  Profitability (NI/TA) Leverage (TL/TA)   Bankruptcy
##  Min.   :-0.59902      Min.   :0.2700   Min.   :-1  
##  1st Qu.:-0.01620      1st Qu.:0.5809   1st Qu.:-1  
##  Median : 0.02223      Median :0.7034   Median : 0  
##  Mean   :-0.00301      Mean   :0.7062   Mean   : 0  
##  3rd Qu.: 0.04656      3rd Qu.:0.8367   3rd Qu.: 1  
##  Max.   : 0.18623      Max.   :1.4633   Max.   : 1

From the above plot we can see that the numerical variables are negatively correlated (with the estimated correlation coefficient of -0.55). We can also see, that the leverage ratio possibly follows a normal distribution and in the bottom left part we can see the fitted regression line.

The figure shows the dependence of leverage ratio on profitability ratio and bankruptcy status in 2001. As we already know from figure 1, the ratios are negatively correlated. We can see that for both levels of bankruptcy variable, the magnitude of correlation is possibly even bigger. Based on the graphics, it appears that the companies that filed for Chapter 11 bankruptcy in 2001 had in general in 1998 lower profitability ratios than companies that survived the stock market crash. It also looks like the companies that filed for Chapter 11 had a slightly bigger leverage ratio than those that didn’t.