This research evaluates the capability of financial ratios for predicting the financial crisis of companies. Predicting the financial crisis of institutions has been constantly the concern of different groups of users, because the final effectiveness of each decision has a direct relation to the accurate predicting of its consequences. One of the tools for predicting the financial crisis of companies is the use of financial ratios as independent variables and attaining some patterns for predicting financial crisis of companies. This research is aimed at presenting a model in a way suitable for Iran’s environmental conditions with a selection of 64 financial ratios for relatively predicting the financial conditions of companies in one, two and three years before bankruptcy. Analyzing the information of two groups, including that of 44 bankrupt and 56 non-bankrupt companies between 2003-2007, using the discriminant analysis, a final model was presented which was able to predict the financial situation of companies in the year of bankruptcy with an accuracy of 94% and in the years previous to the bankruptcy with an accuracy of more than 80%, showing the high potential of financial ratios for predicting.

Recent bankruptcies at international level and on different groups of users have attracted special attention of researchers. The logical concerns of owners, investors, commercial partners and creditors about the financial situation of a company have resulted in demand for appropriate tools to assess the amount of financial capability of companies.

There have always been risk and uncertainty about decision making in financial matters. One of the methods for helping the users to decrease this risk and uncertainty is the presentation of models for predicting the general scope of the company. If these predictions are closer to the reality, they will be the basis for more accurate decisions (Mehrani et al., 2005a). The application of predicting models using financial ratios to predict the financial crisis is one of the accepted tools in this case.

In Tehran Stock Exchange, there are some successful and unsuccessful companies which make the investors worry. Thus, considering the importance of this matter, presentation of a model which is suitable to the needs of users and their environmental situation for predicting financial crisis is of great importance. By doing so, firstly, we can warn the companies beforehand of the occurrence of financial distress. So that they can take necessary actions. Secondly, the investors and creditors can differentiate the desirable investing opportunities from the undesirable ones (Mehrani et al., 2005a).

In this research, we have tried to predict the crisis of the company by considering the accounting information. If the accounting information has the capability of predicting the crisis, we can suggest a model to warn the shareholders and other claimants about losing the control in companies. Unawareness of the critical situation of the company can lead to enormous losses for each of the claimants. By predicting the constant dissolution of the companies, we can make necessary plans for preventing their inevitable death. Therefore, this research attempts to present a minute model for predicting the financial crisis, considering the accounting information of the companies accepted in Tehran Stock Exchange (Sheikhi, 2010).

Behavioral Finance Journal, Asset Pricing, Contingent States, Capital Asset Pricing Model, Prospect Theory, Financial Literature, Bullish Market, Asymmetric Evaluation, Capital Asset Pricing Model, French Market, Political Crises, Asian Financial Crisis.