BANKRUPTCY DISCRIMINATION WITH REAL VARIABLES

Authors

  • Harlan D. Platt,

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      The first and second authors are, respectively, Professor of Finance and Associate Professor of Management Science at the College of Business Administration, Northeastern University, Boston MA. The third author is the Personal Adviser to the Minister of Labour in the Royal Ministry of Finance, Norway. This research was supported in part by a grant from Arthur Andersen and Co. The encouragement and comments of Ronald Copeland, Martin Fridson, Jeff Makholm, and Katherine Schipper are gratefully acknowledged. The authors also wish to acknowledge insightful comments of the anonymous referee on earlier drafts of this paper. Any remaining errors are the authors' responsibility.

  • Marjorie B. Platt,

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      The first and second authors are, respectively, Professor of Finance and Associate Professor of Management Science at the College of Business Administration, Northeastern University, Boston MA. The third author is the Personal Adviser to the Minister of Labour in the Royal Ministry of Finance, Norway. This research was supported in part by a grant from Arthur Andersen and Co. The encouragement and comments of Ronald Copeland, Martin Fridson, Jeff Makholm, and Katherine Schipper are gratefully acknowledged. The authors also wish to acknowledge insightful comments of the anonymous referee on earlier drafts of this paper. Any remaining errors are the authors' responsibility.

  • Jon Gunnar Pedersen

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      The first and second authors are, respectively, Professor of Finance and Associate Professor of Management Science at the College of Business Administration, Northeastern University, Boston MA. The third author is the Personal Adviser to the Minister of Labour in the Royal Ministry of Finance, Norway. This research was supported in part by a grant from Arthur Andersen and Co. The encouragement and comments of Ronald Copeland, Martin Fridson, Jeff Makholm, and Katherine Schipper are gratefully acknowledged. The authors also wish to acknowledge insightful comments of the anonymous referee on earlier drafts of this paper. Any remaining errors are the authors' responsibility.


Abstract

This paper reconsiders the accepted usage of nondeflated financial ratios in statistical models to differentiate between failed and nonfailed firms. Non-deflated ratios are hypothesized to inadequately reflect inter-temporal macroeconomic fluctuations that affect the ability of firm's to survive. Using a sample of 124 oil and gas companies between the period 1982–1988, the going concern assumption is evaluated with statistical logit models using either nondeflated or deflated financial ratios. Deflated company ratios are created by transforming data with price indices or by creating market value ratios. Empirical results suggest that a superior bankruptcy early warning model is developed for the oil and gas industry by creating real financial and reserve ratios and by introducing external factors, such as oil prices, interest rates and accounting method, as independent predictors. Overall classification accuracy is approximately 95 percent.

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