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For many years, premonition of financial distress and corporate bankruptcy is under discussion. Many researchers as well as professionals and academicians contend that these are the most critical factor of corporate decision making. Researchers and specialist are involved in developing models and techniques to predict financial distress and business failures. Forewarnings and prediction of financial conditions of the companies at an appropriate point of time allows the management, investors and other counterparts to take appropriate remedial measures and develop efficient processes and policies. Many researchers and experts believe that financial statement analysis and financial accounting ratios have the ability to predict and forecast the financial distress and financial health of a particular company. The purpose of this research work is to develop, test and present the most appropriate financial distress prediction model for the manufacturing sector of Pakistan. Matched pair research design is used in this research work. The distressed and non-distressed companies have been matched by industry, year and asset size. Out of 517 manufacturing Companies, 134 Companies financial statements were finally matched selected and analyzed for five years prior to distress and checked for the mean differences and similarity for distressed and non-distressed groups consisting of sixty seven companies in each group. Afterwards, based on the previous literature recommendations, three financial distress prediction models were developed. Multiple discriminant analysis, Logit and Probit analysis techniques were engaged for the development of new models. All the techniques and methods used accounting and financial ratios calculated from the income statements and balance sheets of the selected distressed and non-distressed companies. Utilizing the financial statement data relating to manufacturing sector companies for the years from 1999 to 2013, twenty five widely used financial and accounting ratios were calculated and analyzed. Stepwise multiple discriminant analysis was used for the identification of the best performed financial ratios for the development of the Z-ScorePakistan model. Afterwards, Logit and Probit models were developed with financial and accounting ratios for the classification of the sampled companies correctly. The results of this research study indicate that models for the distressed and non-distressed Companies show dissimilarity with the results of the non-distressed companies. 13 out of total 25 ratios were considered as the most relevant for the identification of financial distress. The tested models clearly discriminate between financially distressed and non-distressed companies. Financial distress can be predicted for the published financial information in Pakistan. This research study also concludes that Logit and Probit models are the most appropriate for prediction of financial distress specifically for manufacturing sector companies of Pakistan.
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