The Effectiveness of Incorporating Stability Measures In Company Failure Models

Betts, John M.; Belhoul, D.

doi:10.1111/j.1468-5957.1987.tb00098.x

Cited by 42 publications

(23 citation statements)

References 26 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…The definition of pre-tax income is annual income before tax, or operating revenue excluding all expenses except income taxes. The latter ratio was employed by Betts and Belhoul (1987).…”

Section: R3: Pre-tax Earnings To Market Value Plus Total Debtmentioning

confidence: 99%

Prediction of distress and identification of potential M&As targets in UK

Polemis

Gounopoulos

2012

Managerial Finance

View full text Add to dashboard Cite

Purpose -This study seeks to identify financial characteristics that can be employed to assess and predict corporate financial distress in publicly traded firms quoted in the London Stock Exchange. Design/Methodology/Approach -The model incorporates three existing literatures as an alternative to bankruptcy. The model has two stages: the first stage discriminates financially healthy or distressed firms utilizing Binary Logit Regression while in the second stage with the use of the univariate analysis, firms are further categorized into four possible outcomes: financially healthy, potentially healthy targets and financially distressed or potentially distressed acquisition targets. Findings -It was found that financial distress could be identified even three years prior the event. Moreover, statistical significant differences were found between the four firm sample groups. Research limitations / implications -The vast changing environment and the financial crisis, highlight the need for future research on the area that will consider the world trade implications along with the individual macroeconomic variables of each country. Originality / Value -It is the first time that a model is developed for the United Kingdom to follow the hazard model"s procedure based on recent financial data. Moreover, due to the scope of the analysis, a new version of the latter procedure is employed. A further innovation that makes the produced model unique is its ability to classify a firm into one of several a priori groupings according to the latter"s individual characteristics. This overcomes the limitation of earlier studies that considered only two possible outcomes for firms.

show abstract

“…The definition of pre-tax income is annual income before tax, or operating revenue excluding all expenses except income taxes. The latter ratio was employed by Betts and Belhoul (1987).…”

Section: R3: Pre-tax Earnings To Market Value Plus Total Debtmentioning

confidence: 99%

Prediction of distress and identification of potential M&As targets in UK

Polemis

Gounopoulos

2012

Managerial Finance

View full text Add to dashboard Cite

show abstract

“…It is expected that the defi ned trend can contribute to improved model stability, in order to eliminate the problem of invariance. Empirical results have shown that the inclusion of stability factors (variables which can offset temporary disturbances and volatilities of the economy) can improve the classifi cation accuracy of forecasting models (Dambolena et al, 1980;Betts et al, 1987;Kahya et al 1999). Several of the variables were seen to be changes not just in ratios, but also trends (Edmister, 1972;Blum, 1974;Lau, 1987;Shumway, 2001;Shin et al, 2005;Neves et al, 2006;Muller et al, 2009;Molina et al, 2009).…”

Section: Defi Nition Of the Trend Variablesmentioning

confidence: 99%

“…Within the study of Betts et al (1987), four trend variables were analysed, measured over a three-year period on total assets, total sales, total number of employees and inventories, but also measuring the change over the previous years. Even if these measures were found to be statistically signifi cant, they did not appear as predictors within their computed discriminant function.…”

Section: Literature Reviewmentioning

confidence: 99%

The Relevance of Trend Variables for the Prediction of Corporate Crises and Insolvencies

Situm

2015

Zagreb International Review of Economics and Business

View full text Add to dashboard Cite

Abstract:This study investigated the potential of a specifi c trend, defi ned as the relative change of accounting ratios for two consecutive years, to improve the classifi cation accuracy and model performance of insolvency prediction models based on multivariate linear discriminant analysis. The results show that the respective trend can include information from both consecutive years, but this informational content could not be exploited to improve early detection of corporate crises and insolvencies.

show abstract

“…They found that when the stability of ratios is taken into account when they study failure predictions, they can obtain a better discriminant function. Betts and Belhoul (1987) also used the variation in the ratios and came to similar conclusions as Damnbolena and Khoury (1980) in that the use of the variation in financial ratios to measure the stability of the ratios and found that improvements in ex post classification results relative to models without measures of variation. They further found that the financial stability concept does not reduce the role played by financial ratio analysis in forecasting company failure, but is merely complementary to it.…”

Section: Review Of Past Studiesmentioning

confidence: 64%

A Longitudinal and Cross-Industry Study on the Stability of Financial Ratios of Malaysian Companies

Yap

Mohamad²,

Chong³

2013

AFR

View full text Add to dashboard Cite

The purpose of this study is to test whether a set of six financial ratios that have been used extensively by practitioners and researchers and found to be useful for various purposes including company financial performance evaluations are stable across three different industry sectors and whether they are stable over time. The sample comprises a total of 180 listed companies covering a period of five years from 2006 to 2010. Analysis of variance and post hoc multiple comparisons were carried out for each ratio to see whether it exhibits a stable profile across industries and over time. The findings showed that four out of the six ratios displayed no significant differences across industries, one (Current Assets Turnover) showed significant differences among all three sectors while the remaining ratio (Cash Flow to Total Assets) showed significant differences between two of the sectors. The test results also showed that all the financial ratios except for Cash Flow to Total Assets for all three industry sectors are stable over time. This finding is surprising in that the years 2008 and 2009 are periods where the financial crisis is at its height and companies' financial data are expected to be adversely affected and where the means of the ratio values in these two years are expected to be volatile and unstable compared to the period before and after the financial crisis. The analysis also showed that there are no interaction effects between sector and time. Thus, some ratios are industry specific and some ratios cannot be extrapolated over time when evaluating financial performance or forecasting future trends.

show abstract

The Effectiveness of Incorporating Stability Measures In Company Failure Models

Cited by 42 publications

References 26 publications

Prediction of distress and identification of potential M&As targets in UK

Prediction of distress and identification of potential M&As targets in UK

The Relevance of Trend Variables for the Prediction of Corporate Crises and Insolvencies

A Longitudinal and Cross-Industry Study on the Stability of Financial Ratios of Malaysian Companies

Contact Info

Product

Resources

About