Are Industry-Relative Financial Ratios More Stable? The Case of Bankruptcy Prediction

Posted: 5 Jun 2015

See all articles by Hong Chen

Hong Chen

National University of Tainan

Tony S. Wirjanto

University of Waterloo - School of Accounting and Finance; University of Waterloo, Department of Statistics & Actuarial Science

Date Written: June 4, 2015

Abstract

Previous research claims that industry-relative financial ratios are more stable than unadjusted ratios. Yet, most bankruptcy studies continue to use unadjusted financial ratios to develop bankruptcy-prediction models. In re-examining whether industry-relative ratios are actually more stable, we find a significant disparity between ex-post and ex-ante classification results both with industry-relative and unadjusted ratios. However, the disparity for industry-relative ratios is significantly smaller. We subsequently develop an industry-relative bankruptcy model based on Altman’s Z-score model that possesses a high classification accuracy one year before bankruptcy. Our results suggest that industry-relative analysis does not necessarily have a higher predictive power; however, it possesses better stability.

Keywords: Bankruptcy prediction; Financial failure; Industry-relative ratio; Logit models

JEL Classification: G01, G32, G33

Suggested Citation

Chen, Hong and Wirjanto, Tony S., Are Industry-Relative Financial Ratios More Stable? The Case of Bankruptcy Prediction (June 4, 2015). Available at SSRN: https://ssrn.com/abstract=2613977

Hong Chen

National University of Tainan ( email )

No. 67號, Róngyù St
Tainan, Dong District 701
Taiwan

Tony S. Wirjanto (Contact Author)

University of Waterloo - School of Accounting and Finance ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1
Canada
519-888-4567 x35210 (Phone)

HOME PAGE: http://https://uwaterloo.ca/statistics-and-actuarial-science/people-profiles/tony-wirjanto

University of Waterloo, Department of Statistics & Actuarial Science ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1
Canada
519-888-4567 x35210 (Phone)
519-746-1875 (Fax)

HOME PAGE: http://math.uwaterloo.ca/statistics-and-actuarial-science/people-profiles/tony-wirjanto

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