Title: PITFALLS IN THE APPLICATION OF DISCRIMINANT ANALYSIS IN BUSINESS, FINANCE, AND ECONOMICS
Abstract: The Journal of FinanceVolume 32, Issue 3 p. 875-900 Article PITFALLS IN THE APPLICATION OF DISCRIMINANT ANALYSIS IN BUSINESS, FINANCE, AND ECONOMICS Robert A. Eisenbeis, Robert A. EisenbeisAssociate Research Division Officer, Division of Research and Statistics, Board of Governors of the Federal Reserve System. The author wishes to thank Drs. Joseph F. Sinkey, Jr. and Edward I. Altman for their helpful comments on this paper. However, all errors and omissions are the responsibility of the author. This work was completed while the author was Assistant Director of Research, FDIC.Search for more papers by this author Robert A. Eisenbeis, Robert A. EisenbeisAssociate Research Division Officer, Division of Research and Statistics, Board of Governors of the Federal Reserve System. The author wishes to thank Drs. Joseph F. Sinkey, Jr. and Edward I. Altman for their helpful comments on this paper. However, all errors and omissions are the responsibility of the author. This work was completed while the author was Assistant Director of Research, FDIC.Search for more papers by this author First published: June 1977 https://doi.org/10.1111/j.1540-6261.1977.tb01995.xCitations: 279 Read the full textAboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onEmailFacebookTwitterLinkedInRedditWechat REFERENCES Irma Adelman and Cynthia Taft Morris. "Performance Criteria for Evaluating Economic Development Potential: An Operational Approach", Quarterly Journal of Economics, 82, no. 2 (May 1968), 260–280. 10.2307/1885897 Web of Science®Google Scholar Edward I. Altman. "Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy", Journal of Finance, 23, No. 4 (September 1968), 589–609. 10.1111/j.1540-6261.1968.tb00843.x Web of Science®Google Scholar Edward I. Altman. "Predicting Railroad Bankruptcies in America", The Bell Journal of Economics and Management Science, Vol. 4, No. 1, Spring 1973. 10.2307/3003144 Web of Science®Google Scholar Edward I. Altman and Steven Katz. " An Analysis of Bond Ratings in the Electric Public Utility Industry", following in Relevant Research in Accounting, Ed. Michael Shiff and George Sirter, (New York, 1975). Google Scholar T. W. Anderson. An Introduction to Multivariate Statistical Analysis (John Wiley and Sons: New York, 1958). Google Scholar T. W. Anderson and R. R. Bahadur. "Classification into Two Multivariate Normal Distributions with Unequal Covariance Matrices", The Annals of Mathematical Statistics, 33 (June 1962). 10.1214/aoms/1177704568 Web of Science®Google Scholar Timothy Bates." An Econometric Analysis of Lending to Black Businessmen", Review of Economics and Statistics, (August 1973). Google Scholar G. E. P. Box. "A General Distribution Theory for a Class of Likelihood Criteria", Biometrika, 36 (1949), 317–346. 10.1093/biomet/36.3-4.317 CASPubMedWeb of Science®Google Scholar W. T. Carleton and E. M. Lerner. "Statistical Credit Scoring of Municipal Bonds", Journal of Money, Credit, and Banking (November 1969). 10.2307/1991449 Google Scholar P. C. Chang and A. A. Afifi. "Classification Based on Dichotomous and Continuous Variables", Journal of the American Statistical Association, Vol. 69, No. 346, June, 1974. 10.1080/01621459.1974.10482949 Web of Science®Google Scholar C. W. Clunies-Ross and R. H. Riffenburgh. "Geometry and Linear Discrimination", Biometrika, 47 (June 1960). 10.1093/biomet/47.1-2.185 Google Scholar C. W. Clunies-Ross. R. H. Riffenburgh. "Linear Discriminant Analysis", Pacific Science, 14 (July 1960) 251–6. Google Scholar W. G. Cochran. "Commentary on 'Estimation of Error Rates in Discriminant Analysis'", Technometrics, Vol. 10, No. 1, February, 1968. Web of Science®Google Scholar W. G. Cochran. "On the Performance of the Linear Discriminant Function", Technometrics, 6 (May 1964), 179–190. 10.1080/00401706.1964.10490162 Web of Science®Google Scholar William W. Cooley and Paul R. Lohnes. Multivariate Procedures for the Behavioral Sciences (John Wiley and Sons: New York, 1962). Google Scholar William W. Cooley. Multivariate Data Analysis, (John Wiley and Sons: New York 1971). Google Scholar R. B. D'Agostino. "Monte Carlo Power Comparison of the W' and D Tests of Normality for n 100", Communications in Statistics, 1 (1973). 10.1080/03610927308827047 Google Scholar Robert R. Dince and James C. Fortson. "The Use of Discriminant Analysis to Predict the Capital Adequacy of Commercial Banks", Journal of Bank Research, Vol. 3, No. 1, Spring 1972. Google Scholar Olive Jean Dunn. "Some Expected Values for Probabilities of Correct Classification in Discriminant Analysis", Technometrics, 13 (May 1971). Web of Science®Google Scholar Olive Jean Dunn and Paul D. Vardy. "Probabilities of Correct Classification in Discriminant Analysis", Biometrics, 22, 1966. 10.2307/2528081 PubMedWeb of Science®Google Scholar R. O. Edmister. " An Empirical Test of Financial Ratio Analysis for Small Business Prediction", Paper presented at the Western Finance Association meetings, Vancouver, B. C., August 30, 1971, Journal of Financial and Quantitative Analysis, March 1972. Google Scholar Robert A. Eisenbeis and Robert B. Avery. Discriminant Analysis and Classification Procedures: Theory and Applications, (Lexington, Mass.: D. C. Heath and Co., 1972). Google Scholar Robert A. Eisenbeis. "Two Aspects of Investigating Group Differences in Linear Discriminant Analysis", Decision Sciences, Vol. 4, No. 4, October, 1973. 10.1111/j.1540-5915.1973.tb00575.x Google Scholar Robert A. Eisenbeis andGary G. Gilbert and Robert B. Avery. " Investigating the Relative Importance of Individual Variables and Variable Subsets in Discriminant Analysis", Communications in Statistics, September, 1973. Google Scholar Robert A. Eisenbeis and Alan S. McCall. "Some Effects of Affiliations Among Mutual Savings and Commercial Banks", Journal of Finance, 27 (September 1972), 865–877. 10.1111/j.1540-6261.1972.tb01317.x Web of Science®Google Scholar Robert A. Eisenbeis and Neil B. Murphy. "Interest Rate Ceilings and Consumer Credit Rationing: A Multivariate Analysis of a Survey of Borrowers", FDIC Working Paper No. 73–4, Southern Economic Journal, July, 1974. 10.2307/1056103 Web of Science®Google Scholar R. A. Fisher. "The Use of Multiple Measures in Taxonomic Problems", Annals of Eugenics, 7 (September 1936). 10.1111/j.1469-1809.1936.tb02137.x Google Scholar R. E. Frank, W. F. Massy and G. D. Morrison. "Bias in Multiple Discriminant Analysis", Journal of Marketing Research, 2 (August 1965), 250–258. 10.2307/3150183 Web of Science®Google Scholar Ethel S. Gilbert. "On Discrimination Using Qualitative Variables", Journal of the American Statistical Association, December, 1968. Google Scholar Ethel S. Gilbert. "The Effect of Unequal Variance-Covariance Matrices on Fisher's Linear Discriminant Function", Biometrics, 25 (September 1969). 10.2307/2528902 PubMedWeb of Science®Google Scholar Gary G. Gilbert. "Predicting de novo Expansion in Bank Merger Cases", FDIC Working Paper No. 72–2, Journal of Finance, Vol. 29, No. 1, March, 1974. 10.1111/j.1540-6261.1974.tb00031.x Web of Science®Google Scholar Gary G. Gilbert. "An Analysis of Federal Regulatory Decisions on Market Extension Bank Merger", Journal of Money Credit and Banking, Vol. 7, No. 1, February, 1975. 10.2307/1991253 Google Scholar A. S. Goldberger. Econometric Methods, (New York: Wiley, 1964). Google Scholar John A. Haslem and William A. Longbrake. "A Discriminant Analysis of Commercial Bank Profitability", Quarterly Review of Economics and Business, Vol. II, No. 3, 1971. Google Scholar M. Hills. "Allocation Rules and Their Error Rates," Journal of the Royal Statistical Society, series B. vol. 28, no. 1 (1966): 1–20 (with discussion pp. 21–31). 10.1111/j.2517-6161.1966.tb00614.x Web of Science®Google Scholar M. Hills. "Discrimination and Allocation with Discrete Data", Applied Statistics, 16, no. 3 (1967). 10.2307/2985920 Web of Science®Google Scholar L. N. Holloway and O. J. Dunn. "The Robustness of Hotelling's T 2 " Journal of the American Statistical Association, 62 (March 1967). PubMedWeb of Science®Google Scholar J. W. Hopkins and P. P. F. Clay. "Some Empirical Distributions of Bivariate T 2 and Homoskedasticity Criterion M under Unequal Variance and Leptokurtosis", Journal of the American Statistical Association, 58 (1963). Web of Science®Google Scholar Joseph J. Horton Jr. "Statistical Classification of Municipal Bonds", Journal of Bank Research, 1 (Autumn, 1970). Google Scholar Koichi Ito and William J. Schull. "On the Robustness of the T 2 Test in Multivariate Analysis of Variance When Variance-Covariance Matrices Are Not Equal", Biometrika, 51 (June 1964). Google Scholar O. Maurice Joy and John O. Tollefson, "On the Financial Applications of Discriminant Analysis", Journal of Financial and Quantitative Analysis, December, 1975. 10.2307/2330267 Web of Science®Google Scholar Robert C. Klemkosky and J. William Petty. "A Multivariate Analysis of Stock Price Variability", Journal of Business Research, 1 (Summer 1973). 10.1016/S0148-2963(73)80026-8 Web of Science®Google Scholar C. J. Kowalski. "The Performance of Some Rough Tests for Bivariate Normality Before and After Coordinate Transformations to Normality", Technometrics, 12 (1970), 517–44. 10.1080/00401706.1970.10488694 Web of Science®Google Scholar Anant M. Kshirsagar. Multivariate Analysis, (Marcel Dekker, Inc.: New York, 1972). Google Scholar Peter A. Lachenbruch. "Discriminant Analysis When the Initial Samples Are Misclassified", Technometrics, Vol. 8, no. 4 (November, 1966). 10.2307/1266637 Web of Science®Google Scholar Peter A. Lachenbruch. "An Almost Unbiased Method of Obtaining Confidence Intervals for the Probability of Misclassification in Discriminant Analysis", Biometrics, 23 (December 1967), 639–645. 10.2307/2528418 CASPubMedWeb of Science®Google Scholar Peter A. Lachenbruch."On Expected Probabilities of Misclassification in Discriminant Analysis, Necessary Sample Size, and a Relation with the Multiple Correlation Coefficient", Biometrics, 24 (December 1968). 10.2307/2528873 Web of Science®Google Scholar Peter A. Lachenbruch."Discriminant Analysis When the Initial Samples are Misclassified II: Non-Random Misclassification Models", Technometrics, Vol. 16, no. 3 (August, 1974). Web of Science®Google Scholar Peter A. Lachenbruch. Discriminant Analysis, (Hafner Press: New York, 1975). Google Scholar Peter A. Lachenbruch.and M. R. Mickey."Estimation of Error Rates in Discriminant Analysis", Technometrics Vol. 10, No. 1 (February, 1968). Web of Science®Google Scholar Peter A. Lachenbruch. Cheryl Sneeringer and Lawrence T. Revo. "Robustness of the Linear and Quadratic Discriminant Function to Certain Types of Non-Normality", Communications Statistics, 1 (1), 39–56 (1973). Google Scholar George W. Ladd. "Linear Probability Functions and Discriminant Functions", Econometrica 34, no. 4 (October 1966). 10.2307/1910106 Web of Science®Google Scholar Sylvia Lane. "Submarginal Credit Risk Classification", Journal of Financial and Quantitative Analysis, 7 (January 1972), 1379–1386. 10.2307/2330069 Web of Science®Google Scholar H. Linhart. "Techniques for Discriminant Analysis with Discrete Variables", Metrica, 2 (1959). 10.1007/BF02613730 Web of Science®Google Scholar Paul R. Lohnes. "Test Space and Discriminant Space Classification Models and Related Significance Tests", Educational and Psychological Measurement, 21, no. 3 (1961). Web of Science®Google Scholar J. F. Malkovich and A. A. Afifi. "On Tests for Multivariate Normality", Journal of the American Statistical Association, Vol. 68, No. 341, March, 1973. Web of Science®Google Scholar Sidney Marks and Olive Jean Dunn. "Discriminant Functions when Covariance Matrices are Unequal", Journal of the American Statistical Association, Vol. 69, No. 346, June, 1974. Web of Science®Google Scholar Paul A. Meyer and Howard W. Pifer. "Prediction of Bank Failures", Journal of Finance, 25 (September 1970), 853–868. 10.1111/j.1540-6261.1970.tb00558.x Web of Science®Google Scholar Donald F. Morrison. Multivariate Statistical Methods (McGraw-Hill Inc.: New York, 1967). Google Scholar F. Mosteller and D. F. Wallace. "Inference in the Authorship Problem", Journal of the American Statistical Association, June, 1963. 10.2307/2283270 Google Scholar R. Norgaard and C. Norgaard. " A Critical Examination of Share Repurchase", Financial Management, Spring, 1974. Google Scholar M. Okamoto. "An Asymptotic Expansion for the Distribution of the Linear Discriminant Function", Annals of Mathematical Statistics, Vol. 34, (1963) p. 1286. 10.1214/aoms/1177703864 Web of Science®Google Scholar Y. E. Orgle. "A Credit Scoring Model for Consumer Loans", Journal of Money, Credit, and Banking, March, 1970. 435–445 10.2307/1991095 Google Scholar George Pinches and Kent Mingo. "A Multivariate Analysis of Industrial Bond Ratings", Journal of Finance, March, 1973. 10.1111/j.1540-6261.1973.tb01341.x Google Scholar George Pinches and Kent Mingo. "The Role of Subordination and Industrial Bond Ratings", Journal of Finance, March, 1975 10.1111/j.1540-6261.1975.tb03171.x Google Scholar Thomas F. Pogue and Robert M. Soldofsky. "What's in a Bond Rating", Journal of Financial and Quantitative Analysis, June, 1969. 10.2307/2329840 Web of Science®Google Scholar O. R. Porebski. "On the Interrelated Nature of the Multivariate Statistics Used in Discriminatory Analysis", British Journal of Mathematical and Statistical Psychology, Vol. 19, pt. 2, November, 1966. 10.1111/j.2044-8317.1966.tb00368.x Google Scholar C. R. Rao. Advanced Statistical Methods in Biometric Research (John Wiley and Sons, New York: 1952). Google Scholar Phillip J. Rulon; David V. Tiedeman; Maurice M. Tatsuoka; Charles R. Langmuir. Multivariate Statistics for Personnel Classification, (John Wiley and Sons, Inc., New York, 1967). Google Scholar H. Sheffé. The Analysis of Variance (New York: John Wiley and Sons, 1959). Web of Science®Google Scholar Richard A. Schick and James A. Verbrugge. "An Analysis of Bank Price-Earnings Ratios", Journal of Bank Research, Vol. 6, No. 2, Summer, 1975. Google Scholar S. S. Shapiro and R. S. Francia. "Approximate Analysis of Variance Test for Normality", Journal of the American Statistical Association, 67 (1972). Web of Science®Google Scholar S. S. Shapiro and R. S. Francia.M. B. Wilk and H. J. Chen. "A Comparative Study of Tests of Normality", Journal of the American Statistical Association, 63 (December 1968), 1343–72. Web of Science®Google Scholar Joseph F. Sinkey, Jr. "A Multivariate Statistical Analysis of the Characteristics of Problem Banks", Journal of Finance, March, 1975. 10.1111/j.1540-6261.1975.tb03158.x Web of Science®Google Scholar C. A. B. Smith. "Some Examples of Discrimination", Annals of Eugenics, 18 (1947). Google Scholar Keith V. Smith. Classification of Investment Securities Using Multiple Discriminant Analysis. Institute Paper No. 101 (Purdue University Institute for Research in the Behavioral, Economic and Management Sciences, 1965). Google Scholar M. Sorum. "Estimating the Expected Probability of Misclassification for a Rule Based on the Linear Discriminant Function: Univariate Normal Case", Technometrics, Vol. 15, No. 2, May 1973. 10.1080/00401706.1973.10489046 Web of Science®Google Scholar David Stuhr and Robert Van Wicklin. " Rating the Financial Condition of Banks; A Statistical Approach to Aid Bank Supervision", Monthly Review, Federal Reserve Bank of New York, September, 1974. Google Scholar Maurice M. Tatsuoka. Multivariate Analysis: Techniques for Educational and Psychological Research (New York: John Wiley and Sons, Inc., 1971). Google Scholar J. E. Walter. "A Discriminant Function for Earnings Price Ratios of Industrial Corporations", Review of Economics and Statistics, 41 (February 1959), 44–52. 10.2307/1925458 Web of Science®Google Scholar John M. Weiner and Olive Jean Dunn. " Elimination of Variables in Linear Discrimination Problems", Biometrics (June, 1966). Google Scholar J. Kenton Zumwalt. " A Multivariate Analysis of the Preferred Stock Ratings of Electric Utilities", Presented at the 1975 Midwest Finance Association meetings, April, 1975. Google Scholar Citing Literature Volume32, Issue3June 1977Pages 875-900 ReferencesRelatedInformation
Publication Year: 1977
Publication Date: 1977-06-01
Language: en
Type: article
Indexed In: ['crossref']
Access and Citation
Cited By Count: 641
AI Researcher Chatbot
Get quick answers to your questions about the article from our AI researcher chatbot