Have Financial Statements Become Less Informative? Evidence from the Ability of Financial Ratios to Predict Bankruptcy

Have Financial Statements Become Less Informative? Evidence from the Ability of Financial Ratios... Using a hazard model, we examine secular changes in the ability of financial statement data to predict bankruptcy from 1962 to 2002. We identify three trends in financial reporting that could influence predictive ability with respect to bankruptcy: FASB standards, the perceived increase in discretionary financial reporting behavior, and the increase in unrecognized assets and obligations. A parsimonious three-variable model provides significant explanatory power throughout the time period, with only a slight deterioration in predictive power from the first to the second time period. The striking feature of the results is the robustness of the predictive models over a forty-year period. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting Studies Springer Journals

Have Financial Statements Become Less Informative? Evidence from the Ability of Financial Ratios to Predict Bankruptcy

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Publisher
Kluwer Academic Publishers
Copyright
Copyright © 2005 by Springer Science+Business Media, Inc.
Subject
Business and Management; Accounting/Auditing; Corporate Finance; Public Finance
ISSN
1380-6653
eISSN
1573-7136
D.O.I.
10.1007/s11142-004-6341-9
Publisher site
See Article on Publisher Site

Abstract

Using a hazard model, we examine secular changes in the ability of financial statement data to predict bankruptcy from 1962 to 2002. We identify three trends in financial reporting that could influence predictive ability with respect to bankruptcy: FASB standards, the perceived increase in discretionary financial reporting behavior, and the increase in unrecognized assets and obligations. A parsimonious three-variable model provides significant explanatory power throughout the time period, with only a slight deterioration in predictive power from the first to the second time period. The striking feature of the results is the robustness of the predictive models over a forty-year period.

Journal

Review of Accounting StudiesSpringer Journals

Published: Dec 24, 2004

References

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