Book-Based VS. Market-Based Indebtedness Ratios in Bankruptcy Prediction on the Polish Capital Market

Jacek Welc

Abstract

Forecasting corporate bankruptcy constitutes an integral and relevant part of financial statement analysis and business valuation. Typically the evaluation of a risk of financial default is based on some ratios, including company’s indebtedness. However, there are various versions of such metrics. In this paper, the book-based and market-based corporate indebtedness ratios are evaluated and compared in terms of the accuracy of their bankruptcy predictions, within a sample of data from the Polish market. The study is based on a sample of 80 firms, in which case at least one bankruptcy filing was announced in a period between the beginning of 2009 and the end of 2015. This sample is compared to the counter-sample of 80 randomly selected firms in which case no any bankruptcy filing occurred in the same years. The general usefulness of both versions of indebtedness ratio in credit risk evaluation has been confirmed by the statistical analysis presented in this study. Despite significant heterogeneity of the sample (which covers wide variety of businesses), the univariate logit models with only one ratio used as an explanatory variable are capable of identifying bankrupt firms (with one-period-ahead forecast horizon) in about 67-71% of cases. However, the research presented in this paper has not confirmed the supremacy of market-based indebtedness ratio over book-based one in predicting corporate financial distress.
Author Jacek Welc (EMaT / DRE)
Jacek Welc,,
- Department of Regional Economy
Journal seriesInternational Journal of Service Science, Management and Engineering, ISSN 2381-6031, e-ISSN 2381-604X, (5 pkt)
Issue year2017
Vol4
No5
Pages45-49
Publication size in sheets0.5
Keywords in Englishbankruptcy prediction, ratio analysis, fundamental analysis, indebtedness ratio
URL http://www.openscienceonline.com/journal/ssme
Languageen angielski
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Welc_Book-Based_VS_Market_Based.pdf 160,17 KB
Score (nominal)5
ScoreMinisterial score = 5.0, 30-09-2019, ArticleFromJournal
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