The Relative Relevance of Cash Flow and Accrual Information for Solvency Assessments: A Multi‐Method Approach

Sharma, Divesh S.; Iselin, Errol R.

doi:10.1111/1468-5957.05421

Cited by 17 publications

(12 citation statements)

References 39 publications

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“…Lenders should consider these differences between the models. The differences between models concur with Mear and Firth (1987) as well as Sharma and Iselin (2003), who suggest that humans are more fallible because they tend to overestimate the less relevant cues and underestimate the more relevant ones. In addition, the results align with Zacharakis and Shepherd (2001) who state that VCs are too confident in their assessment of a start-up when they predict a very high level of success.…”

Section: Resultssupporting

confidence: 86%

Lender evaluations of start-up business prospects

Miettinen

Niskanen

2015

Managerial Finance

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If you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service information about how to choose which publication to write for and submission guidelines are available for all. Please visit www.emeraldinsight.com/authors for more information. About Emerald www.emeraldinsight.comEmerald is a global publisher linking research and practice to the benefit of society. The company manages a portfolio of more than 290 journals and over 2,350 books and book series volumes, as well as providing an extensive range of online products and additional customer resources and services.Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committee on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive preservation. AbstractPurpose -The purpose of this paper is to investigate lender evaluations of start-up success in a sample of Finnish firms that are customers of a state-owned financial institution. The database allows the authors to examine how qualitative information, based on the personal history, firm-specific characteristics, subjective credit-analyst evaluations of business prospects, and market position impact firm performance. Design/methodology/approach -The data for this study was collected in 2003 and 2005 from the database of Finnvera, a state-owned financial institution. The authors employed logistic regression in the analyses, using t-test analyses to describe the sample before developing the different models. Findings -The results suggest that the lenders' evaluations of the business prospects at the start are suitable predictors of good performance. However, the determinants of the actual firm performance (at t5) and business prospects (at t0) are, to some extent, different. The results confirm previous findings indicating that humans display fallibility because they have a tendency to overestimate less relevant cues and, conversely, underestimate the more relevant ones.Research limitations/implications -The study data includes only the customers of a state-owned financial institution; therefore, the results cannot be generalized across other financiers. Another constraint relates to the pre-selection bias, since this data excludes information on loan applicants who were rejected, which was not recorded in the lender's files. Practical implications -The findings of this study provide lenders (especially state-owned financiers), policy makers, and entrepreneurs with clearer guidance regarding the important aspects of a firm's period of establishment. For lenders, this may provide a step toward improving the quality of judgments. Originality/value -This paper is one of the few that sheds light on lender evaluations using non-accounting variables in order to examine their ability to predict firm performance, not failure, and to compare it with lenders' evaluation. Another original contribution is that the data consists of the customers of a state-owned financial institution.

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Section: Resultssupporting

confidence: 86%

Lender evaluations of start-up business prospects

Miettinen

Niskanen

2015

Managerial Finance

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“…PCA is mainly used in combination with neural networks (Mensah, 1984;Zavgren, 1985;Gombola et al 1987;Skogsvik 1990;Alici, 1996;Sharma and Iselin, 2003;Shin and Lee, 2003;Wang, 2004;Canbas et al, 2005;Min and Lee, 2005;Tang and Chi, 2005;Shin et al, 2006;Sookhanaphibarn et al, 2007;Yao, 2007. Ravi andPramodh, 2008;Chen and Du 2009;Balas et al, 2010).…”

Section: Literature Reviewmentioning

confidence: 99%

Predicting Bankruptcy of Belgian SMEs: A Hybrid Approach Based on Factorial Analysi

Cultrera¹,

Croquet²,

Jospin³

2017

IBR

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The aim of this paper is to verify the relevance of technical data analysis which seems to be useful for identifying predictors of bankruptcy of Belgian SMEs. To do so, a sample of 1,860 Belgian companies, including healthy and bankrupt firms, was used. The sample was constituted using Belfirst software (2015). A mixed method data analysis, coupling the Ward aggregation criterion, the method of mobile centres and principal component analysis, was performed on the variables commonly cited in the literature as predictive of corporate bankruptcies. The results of this study show that the use of these methods is not relevant in the context of bankruptcy prediction using this sample, but the results of the logistic regressions did not question the discriminatory power of the introduced active variables.

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“…As lenders, banks prefer to employ cash flow statements of borrowers when banks make credit decisions and evaluate risks. Studies demonstrated that the accuracy of assessing borrowers' solvency differs among lending managers of commercial banks who use cash flow data compared to those who use earnings data (Sharma and Iselin, 2003;Curtis et al, 2020).…”

Section: Theoretical Framework and Literature Reviewmentioning

confidence: 99%

The Relationship between Both Accounting Earnings and Cash Flows, and Cash Dividends for Commercial Banks Operating in Jordan

Abdallah¹,

Abdulrazzak²,

Mohammed³

2020

IJEBA

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In this paper, we apply the analytical approach to test hypotheses using the published financial statements for the period (2010-2018). The data is analyzed by employing the statistical program (SPSS). Researchers mainly use the (OLS) multiple linear regression approach to analyzing the study sample's financial data, which consists of (13) Jordanian commercial Banks listed on the Amman Stock Exchange. Findings: The study concludes that there is no relationship between changes in operating, investing, and financing cash flows and changes in cash dividends of commercial banks operating in Jordan. However, there is a statistically significant relationship between changes in earnings and changes in cash dividends. Furthermore, the results show that the size of liabilities affects only the relationship between accounting earnings changes and changes in cash dividends. Practical Implications: Jordanian commercial banks should logically link cash flows and accounting earnings when making cash dividend decisions, as relying on cash flows is important in knowing their ability to fulfill obligations and determining liquidity. Originality/Value: Several controversial studies have examined the ability of earnings and cash flows to judge non-financial firms' performance. The value of this paper is to report the first direct test of the link between both accounting earnings and cash flows from operating, investing, and financing activities from one side, and cash dividends from another side for commercial banks operating in Jordan, and the effect of liabilities on this relationship.

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The Relative Relevance of Cash Flow and Accrual Information for Solvency Assessments: A Multi‐Method Approach

Cited by 17 publications

References 39 publications

Lender evaluations of start-up business prospects

Lender evaluations of start-up business prospects

Predicting Bankruptcy of Belgian SMEs: A Hybrid Approach Based on Factorial Analysi

The Relationship between Both Accounting Earnings and Cash Flows, and Cash Dividends for Commercial Banks Operating in Jordan

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