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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

61 citations0/0 files storedJournal of Business Finance &amp Accounting

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Financial Distress and Bankruptcy Prediction Corporate Insolvency and Governance Financial Reporting and Valuation Research

Abstract

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.

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References

1980Financial Ratios and the Probabilistic Prediction of Bankruptcy 1966Financial Ratios As Predictors of Failure 1984Methodological Issues Related to the Estimation of Financial Distress Prediction Models 1972A Discriminant Analysis of Predictors of Business Failure 1974Failing Company Discriminant Analysis 1990Dividend Policy and Financial Distress: An Empirical Investigation of Troubled NYSE Firms 1985Classifying Bankrupt Firms with Funds Flow Components 1987A Five-State Financial Distress Prediction Model

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