An empirical evaluation of the effectiveness of financial ratio analysis in predicting corporate bankruptcy for technology firms in the United States.

In the field of measuring and managing credit risk, structural models have gained wide recognition due to their ability to anticipate firm’s default risk very early. On the other hand, traditional methods of assessing credit risk such as ratings and financial ratios analysis have their appeal in...

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Main Authors: Luu, Thi Thu Trang., Tran, Thu Thao., Tan, Hong Yi.
Other Authors: Leon Chuen Hwa
Format: Final Year Project
Language:English
Published: 2010
Subjects:
Online Access:http://hdl.handle.net/10356/21214
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Institution: Nanyang Technological University
Language: English
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spelling sg-ntu-dr.10356-212142023-05-19T07:23:11Z An empirical evaluation of the effectiveness of financial ratio analysis in predicting corporate bankruptcy for technology firms in the United States. Luu, Thi Thu Trang. Tran, Thu Thao. Tan, Hong Yi. Leon Chuen Hwa Nanyang Business School DRNTU::Business::Finance::Risk management In the field of measuring and managing credit risk, structural models have gained wide recognition due to their ability to anticipate firm’s default risk very early. On the other hand, traditional methods of assessing credit risk such as ratings and financial ratios analysis have their appeal in its being unsophisticated and easy to understand. This paper aims to calibrate a model which is simplistic yet effective at warning firm’s default risk. Our analysis covers 64 listed technology firms in the United Stated whose stocks and options had been actively traded from 1998-2008. Study reveals that there is a weak positive correlation between the probabilities of default (PD) predicted by the Merton’s model and Standard & Poor’s average 1-year default rates for different rating scales. Consistent with studies done by KMV Corporation, it suggests that ratings may not be responsive to firm’s changing default risk. Distance-to-default (D2), in the (Merton, 1974) structural model, is found to be positively correlated with four out of five independent variables in the well-known Altman Credit- Scoring Model. D2 also has positive correlation with other financial ratios which were selected based on the criteria set by (Chen & Shimerda, 1981). Out of all these financial ratios, two, namely earnings before interest and taxes/total assets (EBIT/TA) and cash flow to sales (CF/S), appear to be strong predictors of D2. Finally, the research concludes with a simple and effective multivariate model of D2. BUSINESS 2010-03-23T01:41:08Z 2010-03-23T01:41:08Z 2010 2010 Final Year Project (FYP) http://hdl.handle.net/10356/21214 en Nanyang Technological University 41 p. application/pdf
institution Nanyang Technological University
building NTU Library
continent Asia
country Singapore
Singapore
content_provider NTU Library
collection DR-NTU
language English
topic DRNTU::Business::Finance::Risk management
spellingShingle DRNTU::Business::Finance::Risk management
Luu, Thi Thu Trang.
Tran, Thu Thao.
Tan, Hong Yi.
An empirical evaluation of the effectiveness of financial ratio analysis in predicting corporate bankruptcy for technology firms in the United States.
description In the field of measuring and managing credit risk, structural models have gained wide recognition due to their ability to anticipate firm’s default risk very early. On the other hand, traditional methods of assessing credit risk such as ratings and financial ratios analysis have their appeal in its being unsophisticated and easy to understand. This paper aims to calibrate a model which is simplistic yet effective at warning firm’s default risk. Our analysis covers 64 listed technology firms in the United Stated whose stocks and options had been actively traded from 1998-2008. Study reveals that there is a weak positive correlation between the probabilities of default (PD) predicted by the Merton’s model and Standard & Poor’s average 1-year default rates for different rating scales. Consistent with studies done by KMV Corporation, it suggests that ratings may not be responsive to firm’s changing default risk. Distance-to-default (D2), in the (Merton, 1974) structural model, is found to be positively correlated with four out of five independent variables in the well-known Altman Credit- Scoring Model. D2 also has positive correlation with other financial ratios which were selected based on the criteria set by (Chen & Shimerda, 1981). Out of all these financial ratios, two, namely earnings before interest and taxes/total assets (EBIT/TA) and cash flow to sales (CF/S), appear to be strong predictors of D2. Finally, the research concludes with a simple and effective multivariate model of D2.
author2 Leon Chuen Hwa
author_facet Leon Chuen Hwa
Luu, Thi Thu Trang.
Tran, Thu Thao.
Tan, Hong Yi.
format Final Year Project
author Luu, Thi Thu Trang.
Tran, Thu Thao.
Tan, Hong Yi.
author_sort Luu, Thi Thu Trang.
title An empirical evaluation of the effectiveness of financial ratio analysis in predicting corporate bankruptcy for technology firms in the United States.
title_short An empirical evaluation of the effectiveness of financial ratio analysis in predicting corporate bankruptcy for technology firms in the United States.
title_full An empirical evaluation of the effectiveness of financial ratio analysis in predicting corporate bankruptcy for technology firms in the United States.
title_fullStr An empirical evaluation of the effectiveness of financial ratio analysis in predicting corporate bankruptcy for technology firms in the United States.
title_full_unstemmed An empirical evaluation of the effectiveness of financial ratio analysis in predicting corporate bankruptcy for technology firms in the United States.
title_sort empirical evaluation of the effectiveness of financial ratio analysis in predicting corporate bankruptcy for technology firms in the united states.
publishDate 2010
url http://hdl.handle.net/10356/21214
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