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Do differences in financial reporting attributes impair the predictive ability of financial ratios for bankruptcy?

Author

Listed:
  • William H. Beaver

    (Stanford University)

  • Maria Correia

    (London Business School)

  • Maureen F. McNichols

    (Stanford University)

Abstract

This study explores the effect of cross-sectional and time-series differences in financial reporting attributes on the predictive ability of financial ratios for bankruptcy. We identify proxies for discretion over financial reporting, the importance of intangible assets, the comprehensiveness of the accounting model and recognition of losses. Each of our proxies for financial reporting attributes is associated with financial ratios that are less informative in predicting bankruptcy. Furthermore, our time-series tests reveal a decline in the predictive ability of financial ratios for bankruptcy and document that this decline is associated with our measures of financial reporting attributes.

Suggested Citation

  • William H. Beaver & Maria Correia & Maureen F. McNichols, 2012. "Do differences in financial reporting attributes impair the predictive ability of financial ratios for bankruptcy?," Review of Accounting Studies, Springer, vol. 17(4), pages 969-1010, December.
    • Handle: RePEc:spr:reaccs:v:17:y:2012:i:4:d:10.1007_s11142-012-9186-7
    DOI: 10.1007/s11142-012-9186-7
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    Keywords

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    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies

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