Corporate financial risk analysis according to the constructal law: exploring the composition of liabilities to assets

Abstract

The purpose of this study was to obtain preliminary evidence in the fields of corporate financial reporting and financial risk analysis on the relevance of applying the constructal law, areas demarcated according to the golden ratio (≈ 1.618:1), and the second law of thermodynamics-assuming that business entities are attracted toward states of maximum debt. More specifically, the study was aimed at contributing to the interpretation of the capital structure formation of business sectors by means of liabilities-to-assets ratio analyses. Data was obtained from published financial statements pertaining to companies that were listed on the Johannesburg Stock Exchange, mainly relating to the financials, basic materials and consumer goods sectors. It was found that, respectively, 82,35% and 100% of the liabilities to assets of the basic materials and consumer goods sectors fell within the demarcated areas during the periods that were reviewed. This indicates the tendency of these sectors to arrange their capital structures according to the constructal law. On the contrary, the highly leveraged capital structure of the financials sector fell distinctly out of the demarcated areas. It is posited that the constructal law, the second law of thermodynamics, as well as the golden ratio are relevant when analysing liabilities to assets; despite of the laws and the ratio being associated with the natural sciences. Further research could lead to the development of new theories regarding corporate financial reporting and risk analysis, with the potential to enhance the transdisciplinary standing and relevance thereof.

Golden ratio-based capital structure as a tool for boosting firm's financial performance and market acceptance

“…(2004) production and inventory control Pan and Jarrett (2013) quality control Finance Fischer (1993) trading strategies Frost and Prechter (2005) stock market movements Livio (2003) stock markets Brown (2010) stock market analysis Lahutta (2016) stock markets Greenblat (2007) market conditions Bhattacharya and Kumar (2006) stock market movements Accounting Amershi and Feroz (2000) fraud detection Chapin (1957) firm growth Biancone et al. (2017) financial ratio analysis Rehwinkel (2016) capital structure analysis Source: Own construction based on Kulis and Hodzic (2020). …”

“…Their research provided inconclusive results. Rehwinkel (2016) applied the fundamentals of the constructal law, areas demarcated according to the golden ratio, and the second law of thermodynamics, assuming that business entities are attracted towards states of maximum debt. The author argues that the constructal law, the second law of thermodynamics, as well as the golden ratio are relevant when analyzing liabilities to assets, despite that the laws and the ratio are associated with natural sciences.…”

Audit Risk Evaluation Model for Financial Statement Based on Artificial Intelligence

“…To prevent the risk of material misstatement, The Chinese Institute of Certified Public Accountants has issued regular Auditing Standards for CPAs of China No. 1211 -Understanding the entity and its environment and assessing the risks of material misstatement [12]. Therefore, it is of practical significance to accurately identify and evaluate the audit risks of financial statement.…”

Cognitive Mechanism of Economic Management Risk Based on EEG Analysis

“…At present, the researches on risk perception are mainly based on the two aspects of behavioral science and cognitive neuroscience. Behavioral science divides the study of risk perception into two levels: individual and group (Cannistraro and Cannistraro, 2016;Ferruzzi et al, 2017;Renn and Swaton, 1984;Rehwinkel, 2016;Tirmizi and Tirmizi, 2017).…”