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A dynamic ratio-based model for signalling corporate collapse

Hossari, Ghassan 2006, A dynamic ratio-based model for signalling corporate collapse, Journal of applied management accounting research, vol. 4, no. 1, pp. 11-32.

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Title A dynamic ratio-based model for signalling corporate collapse
Author(s) Hossari, Ghassan
Journal name Journal of applied management accounting research
Volume number 4
Issue number 1
Start page 11
End page 32
Publisher Institute of Certified Management Accountants
Place of publication Clayton, Vic.
Publication date 2006
ISSN 1443-9905
Keyword(s) corporate collapse
bankruptcy prediction
behavioural finance
classical rational theory
heuristic behavioural theory
financial ratios
multiple discriminant analysis
Summary The recognition of behavioural elements in finance has caused major shifts in the analytic framework pertaining to ratio-based modeling of corporate collapse. The modeling approach so far has been based on the classical rational theory in behavioural economics, which assumes that the financial ratios (i.e., the predictors of collapse) are static over time. The paper argues that, in the absence of rational economic theory, a static model is flawed, and that a suitable model instead is one that reflects the heuristic behavioural framework, which is what characterises behavioural attributes of company directors and in turn influences the accounting numbers used in calculating the financial ratios. This calls for a dynamic model: dynamic in the sense that it does not rely on a coherent assortment of financial ratios for signaling corporate collapse over multiple time periods. This paper provides empirical evidence, using a data set of Australian publicly listed companies, to demonstrate that a dynamic model consistently outperforms its static counterpart in signaling the event of collapse. On average, the overall predictive power of the dynamic model is 86.83% compared to an average overall predictive power of 69.35% for the static model.
Language eng
Field of Research 150105 Management Accounting
HERDC Research category C1 Refereed article in a scholarly journal
Persistent URL http://hdl.handle.net/10536/DRO/DU:30003748

Document type: Journal Article
Collection: Deakin Graduate School of Business
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