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BANKRUPTCY DISCRIMINATION WITH REAL VARIABLES
Author(s) -
Platt Harlan D.,
Platt Marjorie B.,
Pedersen Jon Gunnar
Publication year - 1994
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/j.1468-5957.1994.tb00332.x
Subject(s) - bankruptcy , econometrics , bankruptcy prediction , economics , financial ratio , logit , sample (material) , value (mathematics) , financial crisis , logistic regression , actuarial science , financial economics , statistics , accounting , finance , mathematics , macroeconomics , chemistry , chromatography
This paper reconsiders the accepted usage of nondeflated financial ratios in statistical models to differentiate between failed and nonfailed firms. Non‐deflated ratios are hypothesized to inadequately reflect inter‐temporal macroeconomic fluctuations that affect the ability of firm's to survive. Using a sample of 124 oil and gas companies between the period 1982–1988, the going concern assumption is evaluated with statistical logit models using either nondeflated or deflated financial ratios. Deflated company ratios are created by transforming data with price indices or by creating market value ratios. Empirical results suggest that a superior bankruptcy early warning model is developed for the oil and gas industry by creating real financial and reserve ratios and by introducing external factors, such as oil prices, interest rates and accounting method, as independent predictors. Overall classification accuracy is approximately 95 percent.