The Effect of General Price-Level Adjustments on the Predictive Ability of Financial Ratios

Ketz, J. Edward

doi:10.2307/2490438

Cited by 36 publications

(13 citation statements)

References 3 publications

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“…The over-sampled group would underestimate classification and prediction error rates. Deakin (1977), Ketz (1978), Dambolena and Khoury (1980), Ohlson (1980) and Zmijewski (1983) address this criticism by using a larger proportion of non-bankrupt firms. They statistically confirm that a sample of larger distressed firms leads to lower prediction errors in both distressed and non-distressed groups of firms.…”

Section: Methodsmentioning

confidence: 99%

Financial Distress Prediction in China

Chen

Marshall

Zhang

et al. 2006

Rev. Pac. Basin Finan. Mark. Pol.

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We use four alternative prediction models to examine the usefulness of financial ratios in predicting business failure in China. China has unique legislation regarding business failure so it is an interesting laboratory for such a study. Earnings Before Interest and Tax to Total Assets (EBITTA), Earning Per Share (EPS), Total Debt to Total Assets (TDTA), Price to Book (PB), and the Current Ratio (CR), are shown to be significant predictors. Prediction accuracy achieves a range from 78% to 93%. Logit and Neural Network models are shown to be the optimal prediction models.

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Section: Methodsmentioning

confidence: 99%

Financial Distress Prediction in China

Chen

Marshall

Zhang

et al. 2006

Rev. Pac. Basin Finan. Mark. Pol.

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“…Norton and Smith (1979) compared the performance of a MDA bankruptcy prediction model using traditional historical cost data and using data adjusted for changes in general price-levels (GPL). They found these were similar, although Solomon and Beck (1980) showed how the model was biased against a finding of predictive GPL data, and Ketz (1978) found that GPL data slightly improved performance. Mensah (1983) came to a similar conclusion as Norton and Smith concerning specific price-level data, and Bazley (1976), using a simulation approach, found that both were slightly inferior to historical cost.…”

Section: The Use Of Financial Ratios F O R Predictive Purpose5mentioning

confidence: 97%

The Analysis and Use of Financial Ratios: A Review Article

Barnes¹

1987

Business Fin & Account

248

110

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Financial ratios are used for all kinds of purposes. These include the assessment of the ability of a firm to pay its debts, the evaluation of business and managerial success and even the statutory regulation of a firm's performance. Not surprisingly they become norms and actually affect performance.' The traditional textbooks of financial analysis also emphasise the need for a firm to use industry-wide averages as targets (Foulke, 1968), and there is evidence that firms do adjust their financial ratios to such targets.* Whittington (1980) identified two principal uses of financial ratios. The traditional, normative use of the measurement of a firm's ratio compared with a standard, and the positive use in estimating empirical relationships, usually for predictive purposes. The former dates back to the late nineteenth century and the increase in US bank credit given as a result of the Civil War when current and non-current items were segregated and the ratio of current assets to current liabilities was developed (Horrigan, 1968;and Dev, 1974). From then the use of ratios both for credit purposes and managerial analysis, focusing on profitability measures soon began. Around 1919 the du Pont Company began to use its famous ratio 'triangle' system to evaluate its operating results, underpinning the modern interfirm comparison scheme introduced in the UK by the British Institute of Management and the British Productivity Council in 1959.The positive use of financial ratios has been of two types: by accountants and analysts to forecast future financial variables, e. g. estimated future profit by multiplying predicted sales by the profit margin (the profit/sales ratio), and, more recently, by researchers in statistical models for mainly predictive purposes such as corporate failure, credit rating, the assessment of risk, and the testing of economic hypotheses in which inputs are financial ratios. These will be reviewed in the section on predictive studies.The reason ratios are used, as opposed to absolute values, is a mathematical one, and is basically in order to facilitate comparison by adjusting for size. However, this assumes that ratios possess the appropriate statistical properties for handling and summarising the data. Also, the statistical models assume,

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“…Taffler (1984) provides a critical review of the outstanding features of the Z-score models documented in the UK. While a few studies in the U.S. find price level-adjusted ratios add incremental information over and above that provided by historic cost ratios (Ketz, 1978;Mensah, 1983), Keasey and Watson (1986) find that the current cost information does not improve the predictive accuracy of the models for small firms in the U.K. Peel, Peel, and Pope (1986) appears to be the earliest attempt to apply a logit-based analysis in the UK. Keasey and Watson (1991) conduct a detailed review of the usefulness of U.K. financial distress prediction models in a management context and show that an improvement in the predictive power might be primarily driven by the inclusion of more years of information.…”

Section: Introductionmentioning

confidence: 99%

Some New Models for Financial Distress Prediction in the UK

Christidis

Gregory

2010

SSRN Journal

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In this paper we develop some new models for the prediction of failure in the UK that add to the literature by showing that "dynamic logit" models that incorporate market variables of the form developed by Chava and Jarrow (2004) and Campbell et al (2008) add considerable power to pure accounting-based models. Importantly, we extend the logic of Campbell et al (2008) by showing that incorporating macroeconomic variables adds predictive power, both in and out-of-sample, to market-based accounting models. Last, we show that adding industry controls gives a modest improvement to such models for UK firms in the case of a models based on accounting, market and economic variables, but a greater improvement in terms of a pure accounting based model.

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The Effect of General Price-Level Adjustments on the Predictive Ability of Financial Ratios

Cited by 36 publications

References 3 publications

Financial Distress Prediction in China

Financial Distress Prediction in China

The Analysis and Use of Financial Ratios: A Review Article

Some New Models for Financial Distress Prediction in the UK

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