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.

Earnings management using estimates and the timing of adoption of accounting standards: An empirical examination of pensions

This study investigates the relationship between adoption timing of Statement of Financial Accounting Standards 87 and earnings management after adoption. Earnings management, defined consistent with Schipper (1989), is tested through hypotheses using (1) a portfolio approach and (2) pension rates. One Hypothesis uses a Modified Jones (1991) Model as a proxy for discretionary accruals and the other uses pension rate estimates.^ Statistically significant relationships are found between adoption timing and (1) discretionary accruals and (2) estimated rate-of-return (ROR) on pension plan assets. Early adopting firms tend to have lower discretionary accruals after adoption than on-time adopters. They also tend to use higher ROR estimates which are not supported by higher actual returns. Thus, while early adopters may be using ROR to manage income, this tends to not result in higher discretionary accruals. ^

A methodology to select an enterprise resource planning system for a small or medium sized enterprise

Enterprise Resource Planning (ERP) systems are software programs designed to integrate the functional requirements, and operational information needs of a business. Pressures of competition and entry standards for participation in major manufacturing supply chains are creating greater demand for small business ERP systems. The proliferation of new offerings of ERP systems introduces complexity to the selection process to identify the right ERP business software for a small and medium-sized enterprise (SME). The selection of an ERP system is a process in which a faulty conclusion poses a significant risk of failure to SME’s. The literature reveals that there are still very high failure rates in ERP implementation, and that faulty selection processes contribute to this failure rate. However, the literature is devoid of a systematic methodology for the selection process for an ERP system by SME’s. This study provides a methodological approach to selecting the right ERP system for a small or medium-sized enterprise. The study employs Thomann’s meta-methodology for methodology development; a survey of SME’s is conducted to inform the development of the methodology, and a case study is employed to test, and revise the new methodology. The study shows that a rigorously developed, effective methodology that includes benchmarking experiences has been developed and successfully employed. It is verified that the methodology may be applied to the domain of users it was developed to serve, and that the test results are validated by expert users and stakeholders. Future research should investigate in greater detail the application of meta-methodologies to supplier selection and evaluation processes for services and software; additional research into the purchasing practices of small firms is clearly needed.^

An examination of accounting and auditing issues related to strategic environmental initiatives

Although corporate environmental accountability is receiving unprecedented attention in the United States from policy makers, the capital market, and the public at large, extant research is limited in its examination of the implications of strategic corporate environmental initiatives on accounting and auditing. The purpose of my dissertation is to address these implications by examining the association between firm environmental initiatives and audit fees, capital expenditures, and earnings quality using multivariate regression analysis. I find that firms engaged in more strategic environmental initiatives tend to have significantly higher audit fees and capital expenditures, and significantly lower levels of earnings manipulation measured using discretionary accruals. These results support the notion that auditors do recognize the importance of environmental initiatives when conducting the year-end financial statement audit, an idea that positively reflects upon the auditor’s monitoring role. The results also demonstrate the increased amount of capital resources required to participate in strategic environmental initiatives, an anecdotal notion that had yet to be empirically supported. This empirical support provides valuable insights on how environmental initiatives materially impact corporate financial statements. Finally, my results extend the extant literature by demonstrating that the superior financial performance reported by environmentally active firms is less likely driven by earnings manipulation by management, and by implication, more likely a result of real economic gains. Taken together, my dissertation establishes a strong and timely foundation for current and future research to explore corporate environmental initiatives in the United States and globally, a topic increasingly gaining momentum in today’s more eco-conscious world.^

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.

Relationship between Changes in Cash Flow and Investments in Publicy Traded Restaurant Firms in the United States

This research investigated the relationship between investments in fixed assets and free cash flows of U.S. restaurant firms while controlling for future investment opportunities and financial constraints. It also investigated investment and cash-flow sensitivity in the context of economic conditions. Results suggested that investments in small firms (with higher financial constraints) had relatively weaker sensitivity to cash flows than investments in large firms (with higher sensitivity). Controlling for economic conditions did not significantly change results. While the debate over sensitivity of investments to cash flows remains unresolved, it has not been explored widely in industry contexts, especially in services such as the restaurant industry. In addition to its contribution to this literature, this paper provides implications for cash-flow management in publicly traded restaurant companies.

Understanding Annual Reports of Hospitality Firms

In her discussion - Understanding Annual Reports of Hospitality Firms - by Elisa S. Moncarz, Associate Professor, School of Hospitality Management, Florida International University, Associate Professor Moncarz initially offers: “Management bears full responsibility for the reporting function of annual reports prepared by publicly-held companies designed to provide interested parties with information that is useful in making business and economic decisions. In Part I the author reviews the content of annual reports of firms in the hospitality industry, while looking at recent developments affecting annual reports. Part 11, in a subsequent issue, will comprise an in-depth examination of the annual report of an actual firm in the hospitality industry, focusing on suggested guidelines and recommendations for how to use annual reports as an aid to the decision-making process in the hospitality industry.” This article is to be considered a primer on reading and understanding annual reports, as well as a glimpse into the dynamics that affect them. In defining what an annual report is, Associate Professor Moncarz informs you with citation, “Annual reports are required by the Securities Exchange Commission (SEC) ¹ for all companies with securities sold to the general public. These reports, which must be issued within 90 days after the close of the calendar (or fiscal) year, comprise a primary source of information about these companies,” she further reports. “Indeed, the official version of the company's history is summed up yearly in its annual report by providing full information of the company's operations over the period as well as what the company is gearing up to accomplish in the next year,” Professor Moncarz closes the definition. Why should thus happen over and above SEC requirements? The financial component is an important one; the author offers her informed view: “The major objective of financial statement reporting is to provide information that is useful to present and potential investors, creditors, and other financial statement users in making rational investment, credit, and similar decisions. Thus, financial statements represent the primary (and most reliable) source of knowledge about a particular firm in the hospitality industry.” The above two paragraphs crystallize the requirement and the objective of annual reports. “A typical annual report of a hospitality firm contains a number of standard features which may be broken down into the following three sections…” General, financial data, and supplementary data are variously bounded and circumscribed for you. As a marketing device and feel-good initiative, the annual report is a useful tool for a hospitality corporation that is in-the-black, and focused on the future, says the author. She cites the Marriott Corporation’s 1985 annual report as an example. Of course, an annual report can also be a harbinger of bad news for shareholders as well. Notes/footnotes and disclosure are key elements to the credibility of any annual report; Professor Moncarz discusses these concepts at length. “Given the likelihood that the hospitality industry will continue to face an uncertain economic environment for some time, financial statement users should become more demanding in their need for information that will help assure the firm's survival and evaluate its ability to generate earnings, increase the firm's investment value, and provide for its future growth,” Professor Moncarz says. “Accordingly, understanding annual reports in the hospitality industry should become even more critical.”