FINANCIAL RATIOS, DISCRIMINANT ANALYSIS AND THE PREDICTION OF CORPORATE BANKRUPTCY

FINANCIAL RATIOS, DISCRIMINANT ANALYSIS AND THE PREDICTION OF CORPORATE BANKRUPTCY ACADEMICIANS SEEM to be moving toward the elimination of ratio analysis as an analytical technique in assessing the performance of the business enterprise. Theorists downgrade arbitrary rules of thumb, such as company ratio comparisons, widely used by practitioners. Since attacks on the relevance of ratio analysis emanate from many esteemed members of the scholarly world, does this mean that ratio analysis is limited to the world of “nuts and bolts”? Or, has the significance of such an approach been unattractively garbed and therefore unfairly handicapped? Can we bridge the gap, rather than sever the link, between traditional ratio “analysis” and the more rigorous statistical techniques which have become popular among academicians in recent years? The purpose of this paper is to attempt an assessment of this issue —the quality of ratio analysis as an analytical technique. The prediction of corporate bankruptcy is used as an illustrative case. 1 Specifically, a set of financial and economic ratios will be investigated in a bankruptcy prediction context wherein a multiple discriminant statistical methodology is employed. The data used in the study are limited to manufacturing corporations. A brief review of the development of traditional ratio analysis as a technique for investigating http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

FINANCIAL RATIOS, DISCRIMINANT ANALYSIS AND THE PREDICTION OF CORPORATE BANKRUPTCY

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Publisher
Wiley Subscription Services, Inc., A Wiley Company
Copyright
1968 The American Finance Association
ISSN
0022-1082
eISSN
1540-6261
D.O.I.
10.1111/j.1540-6261.1968.tb00843.x
Publisher site
See Article on Publisher Site

Abstract

ACADEMICIANS SEEM to be moving toward the elimination of ratio analysis as an analytical technique in assessing the performance of the business enterprise. Theorists downgrade arbitrary rules of thumb, such as company ratio comparisons, widely used by practitioners. Since attacks on the relevance of ratio analysis emanate from many esteemed members of the scholarly world, does this mean that ratio analysis is limited to the world of “nuts and bolts”? Or, has the significance of such an approach been unattractively garbed and therefore unfairly handicapped? Can we bridge the gap, rather than sever the link, between traditional ratio “analysis” and the more rigorous statistical techniques which have become popular among academicians in recent years? The purpose of this paper is to attempt an assessment of this issue —the quality of ratio analysis as an analytical technique. The prediction of corporate bankruptcy is used as an illustrative case. 1 Specifically, a set of financial and economic ratios will be investigated in a bankruptcy prediction context wherein a multiple discriminant statistical methodology is employed. The data used in the study are limited to manufacturing corporations. A brief review of the development of traditional ratio analysis as a technique for investigating

Journal

The Journal of FinanceWiley

Published: Sep 1, 1968

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