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The Relevance of Stock and Flow-Based Reporting Information In Assessing the Likelihood of Emergence from Corporate Financial Distress

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  • Gregory Kane
  • Frederick Richardson
  • Uma Velury

Abstract

A number of recent studies have shown that earnings information is less useful and value relevant when firms are financially troubled. This finding has given rise to the consideration of alternatives. In this paper, we examine the contributions of book value-based proxies (normal earnings and abandonment value) and flow-based proxies (earnings and operating accruals) to the assessment of the likelihood of emergence from financial distress. Our prior reasoning is that while book value-based proxies may provide information about potential future cash resources, flow-based proxies, because they capture the progress of reorganization efforts underway, as opposed to mere potential, should be relatively more useful in assessing the likelihood of emergence from distress. Our findings are consistent with this explanation. We document that the primary predictors of emergence are flow-based proxies—in particular, cash from operations, net of earnings. Copyright Springer Science + Business Media, Inc. 2006

Suggested Citation

  • Gregory Kane & Frederick Richardson & Uma Velury, 2006. "The Relevance of Stock and Flow-Based Reporting Information In Assessing the Likelihood of Emergence from Corporate Financial Distress," Review of Quantitative Finance and Accounting, Springer, vol. 26(1), pages 5-22, February.
    • Handle: RePEc:kap:rqfnac:v:26:y:2006:i:1:p:5-22
    DOI: 10.1007/s11156-006-7030-5
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    References listed on IDEAS

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    6. Daniel M. Bryan & Samuel L. Tiras & Clark M. Wheatley, 2002. "The Interaction of Solvency with Liquidity and its Association with Bankruptcy Emergence," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 29(7‐8), pages 935-965.
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    Cited by:

    1. Wikil Kwak & Yong Shi & Gang Kou, 2012. "Bankruptcy prediction for Korean firms after the 1997 financial crisis: using a multiple criteria linear programming data mining approach," Review of Quantitative Finance and Accounting, Springer, vol. 38(4), pages 441-453, May.
    2. Santanu Das, 2012. "The role of leverage and stock-based variables in the prediction of cash flows and earnings - some evidence from India," Afro-Asian Journal of Finance and Accounting, Inderscience Enterprises Ltd, vol. 3(1), pages 1-14.
    3. Tsung-Kang Chen & Hsien-Hsing Liao & Chia-Wu Lu, 2011. "A flow-based corporate credit model," Review of Quantitative Finance and Accounting, Springer, vol. 36(4), pages 517-532, May.
    4. Jiang-Chuan Huang & Hueh-Chen Lin & Daniel Huang, 2022. "The Effect of Operating Cash Flow on the Likelihood and Duration of Survival for Marginally Distressed Firms in Taiwan," Sustainability, MDPI, vol. 14(24), pages 1-20, December.
    5. Philip Sinnadurai & Norashikin Ismail & Noor Marini Haji-Abdullah, 2022. "Prediction of corporate recovery in Malaysia," Review of Quantitative Finance and Accounting, Springer, vol. 59(4), pages 1303-1334, November.

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