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Cash Flow in Bankruptcy Prediction
Journal article   Peer reviewed

Cash Flow in Bankruptcy Prediction

Michael Gombola, Mark Haskins, J Ketz and David Williams
Financial management, v 16(4), pp 55-65
01 Dec 1987
DOI: https://doi.org/10.2307/3666109
Featured in Collection :   UN Sustainable Development Goals @ Drexel

Abstract

Cash flow Decision making models Discriminant analysis Estimates Financial ratios Methods Predictions Bankruptcy
An attempt is made to determine whether cash flow from operations (CFFO) is important in the prediction of corporate failure after the mid-1970s. Failed firms are identified by a list from Dun and Bradstreet and by the COMPUSTAT Research tape. The methodology used is linear discriminant analysis. Results show that the models are significant when they are estimated over all years or over just the early years. For the late years, they are significant only for years one and 2. The models are relatively good one year before failure and usually decay as the time before failure increases. Adding CFFO/ASSETS (cash/total assets) to the model assists its classificatory power in the first year only. Years 2 and 3 show a predictive decline; year 4 remains steady. Therefore, CFFO/ASSETS does not add greater predictive ability, and the marginal increase in year one is not statistically significant. CFFO may be a possible predictor of failure, but only in the very short term.

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43 citations in Web of Science

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UN Sustainable Development Goals (SDGs)

This publication has contributed to the advancement of the following goals:

#17 Partnerships for the Goals
#8 Decent Work and Economic Growth

Source: SDGs in the Output

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Collaboration types
Domestic collaboration
Web of Science research areas
Business, Finance
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