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AN EMPIRICAL STUDY OF THE INCREMENTAL PREDICTIVE ABILITY OF BEAVER'S NAIVE OPERATING FLOW MEASURE USING FOUR‐STATE ORDINAL MODELS OF FINANCIAL DISTRESS
Author(s) -
Ward Terry J.
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.tb00335.x
Subject(s) - measure (data warehouse) , depreciation (economics) , amortization , net income , economics , financial distress , cash flow , distress , econometrics , earnings before interest and taxes , actuarial science , finance , psychology , computer science , loan , microeconomics , financial system , profit (economics) , data mining , financial capital , capital formation , psychotherapist
The purpose of this paper is to determine why net income adjusted for depreciation and amortization (NOF) is a strong predictor of financial distress. This paper develops four‐state ordinal financial distress models lagged one, two, and three years before financial distress to test NOF, instead of using dichotomous bankrupt and nonbankrupt models. The results of this paper suggest that NOF is a strong predictor of financial distress because NOF is an alternative measure of economic income, not because NOF is a naive measure of operating cash flow. For this study, NOF is even a better measure of economic income than net income.