Discriminant analysis and factor analysis: Theory and method

Abstract

Three multivariate techniques, namely, discriminant analysis, factor analysis, and principal component analysis, are discussed in detail. In addition, the stepwise discriminant analysis by Pinches and Mingo (1973) is improved using a goal programming technique. These methodologies are applied to determine useful financial ratios and the subsequent bond ratings. The analysis shows that the stepwise discriminant analysis fails to be an efficient solution as the hybrid approach using the goal programming technique outperforms it, which is a compromised solution for the maximization of the two objectives, namely, the maximization of the explanatory power and the maximization of discriminant power.