Explores whether the firm's discretionary narrative disclosures measure its financial risk of bankruptcy. Specifically examines the existence of an association between the content of the chairman's statement and firm failure. Show that these statements are closely associated with financial performance, reinforcing the argument that such unaudited disclosures contain important information. The results have implications both for the form and content of future narrative disclosures by management.
Adopts an empirical approach to demonstrate that a marked
difference exists between the terms “readability” and
“understandability”, suggesting that “reading
ease”, as measured by formulae like FLESCH and LIX based on word
and sentence complexity, conveys data which may be different to that
conveyed by tests of the understandability of the message. The CLOZE
method is used as a measure of understandability with audiences of
differing accounting sophistication to measure the predictability of the
narrative and to demonstrate inter‐group and inter‐formulae
distinctions. Analysis of the results suggests that readability and
understandability are different concepts and that standard setters
should pay more attention to “understandability” as a
desirable characteristic of accounting disclosures since there is a
danger that the intended messages are of a complexity beyond the
sophistication of the target audience.
Recently developed corporate bankruptcy prediction models adopt a contingentclaims valuation approach. However, despite their theoretical appeal, tests of their performance compared with traditional simple accounting-ratio-based approaches are limited in the literature. We find the two approaches capture different aspects of bankruptcy risk, and while there is little difference in their predictive ability in the UK, the z-score approach leads to significantly greater bank profitability in conditions of differential decision error costs and competitive pricing regime.
Recently developed corporate bankruptcy prediction models adopt a contingent claims valuation approach. However, despite their theoretical appeal, tests of their performance compared with traditional simple accounting-ratio-based approaches are limited in the literature. We find the two approaches capture different aspects of bankruptcy risk, and while there is little difference in their predictive ability in the UK, the z-score approach leads to significantly greater bank profitability in conditions of differential decision error costs and competitive pricing regime. Ó 2007 Published by Elsevier B.V.
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