A comprehensive study of bankruptcy prediction: Accounting ratios, market variables, and microstructure

Bankruptcy prediction has been a fruitful area of research. Univariate analysis and discriminant analysis were the first methodologies used. While they perform relatively well at correctly classifying bankrupt and nonbankrupt firms, their predictive ability has come into question over time. Univariate analysis lacks the big picture that financial distress entails. Multivariate discriminant analysis requires stringent assumptions that are violated when dealing with accounting ratios and market variables. This has led to the use of more complex models such as neural networks. While the accuracy of the predictions has improved with the use of more technical models, there is still an important point missing. Accounting ratios are the usual discriminating variables used in bankruptcy prediction. However, accounting ratios are backward-looking variables. At best, they are a current snapshot of the firm. Market variables are forward-looking variables. They are determined by discounting future outcomes. Microstructure variables, such as the bid-ask spread, also contain important information. Insiders are privy to more information that the retail investor, so if any financial distress is looming, the insiders should know before the general public. Therefore, any model in bankruptcy prediction should include market and microstructure variables. That is the focus of this dissertation. The traditional models and the newer, more technical models were tested and compared to the previous literature by employing accounting ratios, market variables, and microstructure variables. Our findings suggest that the more technical models are preferable, and that a mix of accounting and market variables are best at correctly classifying and predicting bankrupt firms. Multi-layer perceptron appears to be the most accurate model following the results. The set of best discriminating variables includes price, standard deviation of price, the bid-ask spread, net income to sale, working capital to total assets, and current liabilities to total assets.

Bankruptcy Situation Model in Small Business: The Case of Restaurant Firms

The purpose of this paper is to describe and discuss the current bankruptcy prediction models. This is done in the context of pros and cons of proposed models to determine the appropriate factors of failure phenomenon in cases involving restaurants that have filed for bankruptcy under Chapter 11. A sample of 11 restaurant companies that filed for bankruptcy between 1993 and 2003 were identified from the Form 8-K reported to the Securities and Exchange Commission (SEC). By applying financial ratios retrieved from the annual reports which contain, income statements, balance sheets, statements of cash flows, and statements of stockholders’ equity (or deficit) to the Atlman’s mode, Springate model, and Fulmer’s model. The study found that Atlman’s model for the non-manufacturing industry provided the most accurate bankruptcy predictions.

Agency Costs, Bankruptcy Costs and the Use of Debt in Multinational Restaurant Firms

The purpose of this paper is to understand whether multinational restaurant firms (MNRF’s) have higher agency and expected bankruptcy costs. Given this expectation, this may have an impact on the amount of debt incurred by MNRF’s. Overall, the findings are consistent with the existing literatue in terms of the positive relationship between MNRF’s and agency and bankruptcy cost. However, it was found that MNRF’s also have more total debt. This is surprising given the higher agency and bankruptcy costs. The importance of this research is that there may be considerations other than agency and bacnkruptcy costs affecting the capital structure decisions of MNRF’s.

The Bankruptcy of Liberalism and Social Democracy in the Neoliberal Age

The increasing similarity between the economic policies of center-left and center-right political parties has effectively diminished the legitimacy of governments in relationship to their citizenry in Western Europe and the U.S. Capitalist democracies during the period of managed capitalism gained legitimacy by the appearance of the separation of capitalist ownership rights in the marketplace from the political institutions that govern capitalism. During this period, Social Democratic parties in Western Europe, and to a lesser extent the Democratic Party in the U.S., paid some amount of attention to labor unions and mass constituents in formulating their policy agendas. The era of neoliberalism (late 1970s to the present) has broken any such appearances, with the dominant political parties, regardless of party label, moving rightward to embrace many of the same economic policy agendas.

Executive characteristics and going concern opinions

Auditors have come under increased scrutiny over the past several years about the growing number of client failures without a warning in the form of a going-concern modified (GCM) audit opinion. Statement on Auditing Standards No. 59 requires auditors to evaluate whether substantial doubt exists on an audit client’s ability to continue as a going concern (AICPA 1988). My dissertation consists of three essays. ^ For the three essays, I empirically investigate issues related to GCM audit opinions and executive characteristics. Specifically, I examine the impact of executive tenure and gender on the issuance of GCM audit opinions. In addition, my dissertation addresses two other unique issues. Given that the Sarbanes-Oxley Act represents an important watershed event in the history and regulation of the accounting profession, I provide evidence about auditors’ propensities to issue GCM audit opinions in the post-SOX period. Further, I also expand extant research in this area by using multiple outcomes and thus go beyond the traditional use of bankruptcy alone as a tool to evaluate auditors’ GCM opinion. ^ The results indicate that, after controlling for other financial characteristics, GCM audit opinions are significantly more likely for firms that have CFOs with short tenure and/or for firms with a female CFO or CEO. However, when examining the association between executive characteristics and two types of reporting errors, the results vary with the type of reporting error. Overall, the results provide evidence that executive characteristics are associated with auditors' reporting decisions. ^

Financial Failure In the Hospitality Industry

The hospitality industry (especially the restaurant segment) has a historically high rate of financial failures. Yet, financial failure in the industry has not received the attention it deserves. In this article, the authors identify basic reasons underlying failed ideas while presenting a study of several hospitality chains that have experienced varying degrees of financial failure. The characteristics and pitfalls of these companies provide the necessary groundwork to explore major lessons to be learned which should aid hospitality management to aviod future business failures.

Executive Characteristics and Going Concern Opinions

Auditors have come under increased scrutiny over the past several years about the growing number of client failures without a warning in the form of a going-concern modified (GCM) audit opinion. Statement on Auditing Standards No. 59 requires auditors to evaluate whether substantial doubt exists on an audit client’s ability to continue as a going concern (AICPA 1988). My dissertation consists of three essays. For the three essays, I empirically investigate issues related to GCM audit opinions and executive characteristics. Specifically, I examine the impact of executive tenure and gender on the issuance of GCM audit opinions. In addition, my dissertation addresses two other unique issues. Given that the Sarbanes-Oxley Act represents an important watershed event in the history and regulation of the accounting profession, I provide evidence about auditors’ propensities to issue GCM audit opinions in the post-SOX period. Further, I also expand extant research in this area by using multiple outcomes and thus go beyond the traditional use of bankruptcy alone as a tool to evaluate auditors’ GCM opinion. The results indicate that, after controlling for other financial characteristics, GCM audit opinions are significantly more likely for firms that have CFOs with short tenure and/or for firms with a female CFO or CEO. However, when examining the association between executive characteristics and two types of reporting errors, the results vary with the type of reporting error. Overall, the results provide evidence that executive characteristics are associated with auditors' reporting decisions.