Financial Ratios as Predictors of Failure: Evidence from ... - ERIM

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Preface The author 1 declares that the text and work presented in this master thesis is original and that no sources other than those mentioned in the text and its references have been used in creating the master thesis. The copyright of the master thesis rests with the author. The author is responsible for its contents. RSM Erasmus University is only responsible for the educational coaching and beyond that cannot be held responsible for the content. 1 The author would like to thank Dr. Ben Tims, and Drs. Johannes Meuer for valuable suggestions and helpful comments. All remaining errors are the author’s responsibility. 1
Abstract This paper presents some empirical results of predicting corporate failure by using various financial ratios. It aims to identify the characteristics that distinguish default and non-default companies. Two samples (matched and non-matched) of Hong Kong based companies are used in this research over the period 2001-2007. By using logistic regression, it shows that level of debt, and return on equity increase corporate failure, whereas bankruptcy decreases with firm size and profitability. The results are in support of capital structure theory and risk-return tradeoff. The predictive power of the logit model is reasonably high in three years prior to default. Keywords: Risk Management, Probability of default, bankruptcy, logistic regression 2
Page 1: 17 Nov 2008 Financial Ratios as Pre
Page 5 and 6: 1. Introduction One year after the
Page 7 and 8: However he did not find substantial
Page 9 and 10: interest in predicting bankruptcy b
Page 11 and 12: atios he employed in the research w
Page 13 and 14: there are specific statistical requ
Page 15 and 16: “returns”, “values” and “
Page 17 and 18: Table 2 Explanatory Variables Varia
Page 19 and 20: which results in high standard erro
Page 21 and 22: Table 7 Variables in the Equation (
Page 23 and 24: Summary. -2 log likelihood (-2LL) i
Page 25 and 26: predicted to be default, it is call
Page 27 and 28: estimation procedure. However it is
Page 29 and 30: Ohlson (1980)). In the second sampl
Page 31 and 32: Reference Altman, E. I., 1968, “F
Page 33 and 34: Hong Kong Society of Accountants, 1
Page 35 and 36: MDA Appendix One Table 1 Literature
Page 37 and 38: Appendix Two Table 4 Descriptive St
Page 39 and 40: Appendix Four Table 9 Coefficients
Page 41 and 42: Appendix Six Table 10 Coefficients
Page 43 and 44: Appendix Eight Table 12 Classificat

Financial Ratios as Predictors of Failure: Evidence from ... - ERIM

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