Monitoring the Financial Trends of Construction Firms in Korea, Japan, and the United States by Using Bankruptcy Prediction Model

The construction industry is a large part of the world economy and thus is susceptible to macroeconomic shifts and prone to fluctuations in economic health due to the effects of financial risk factors. Reports show that unlike those in the Japanese market, many architecture, engineering and construction (AEC) companies in Korea and the U.S. have either failed or experienced financial distress. Understanding and evaluating financial management indicators are an important part of maintaining fiscal well-being and avoiding corporate ruin. Construction experts are now also concerned about consequences that follow a recession, like the labor deficit. To date no prediction models have been able to accurately predict the next recession following the 2008 recession caused by subprime lending. However, maintaining financial strength is always an encouraged business practice that contributes to avoiding financial hardship including bankruptcy. The Altman Z-score is a bankruptcy prediction model based on multivariate discriminant analysis and used for data investigation. In this study, financial ratios are derived from the financial statements of construction companies and compared among three countries: Korea, Japan, and the U.S. Financial statements are an important area to study because they are a reflection of a company’s management style, culture, and social structure. This study seeks to reveal the similarities and differences in the financial indicators of companies. The findings of the research from financial ratios will provide better understanding of construction companies from different countries while offering insight into proper financial management.