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Corporate prediction models, ratios or regression analysis?

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  • Bijnen, E.J.
  • Wijn, M.F.C.M.
    (Tilburg University, Faculty of Economics and Business Administration)
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    Abstract

    The models developed in the literature with respect to the prediction of a company s failure are based on ratios. It has been shown before that these models should be rejected on theoretical grounds. Our study of industrial companies in the Netherlands shows that the ratios which are used in insolvency models do not have the predicting properties they are credited with. We have investigated whether the alternative for ratios mentioned in the literature, i.e. the regression analysis, gives reliable insolvency models. However, the regression analysis appears to be useful in a limited sense only, depending on the size of the company.

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    Bibliographic Info

    Paper provided by Tilburg University, Faculty of Economics and Business Administration in its series Research Memorandum with number 658.

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    Date of creation: 1994
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    Handle: RePEc:dgr:kubrem:1994658

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    Web page: http://www.tilburguniversity.edu/nl/over-tilburg-university/schools/economics-and-management/

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    1. Platt, Harlan D. & Platt, Marjorie B., 1991. "A note on the use of industry-relative ratios in bankruptcy prediction," Journal of Banking & Finance, Elsevier, vol. 15(6), pages 1183-1194, December.
    2. Lev, Baruch & Sunder, Shyam, 1979. "Methodological issues in the use of financial ratios," Journal of Accounting and Economics, Elsevier, vol. 1(3), pages 187-210, December.
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