Title: Financial and non-financial information in reorganisation failure prediction

Authors: Eija-Leena Kärkinen; Erkki K. Laitinen

Addresses: Department of Accounting and Finance, Faculty of Business Studies, University of Vaasa, P.O. Box 700, 65101 Vaasa, Finland ' Department of Accounting and Finance, Faculty of Business Studies, University of Vaasa, P.O. Box 700, 65101 Vaasa, Finland

Abstract: The purpose of this paper is to analyse the contribution of financial and non-financial information on predicting reorganisation failure of very small entrepreneurial firms. The data used in this study consist of a sample of Finnish firms (n = 68) reorganising under Finnish Company Reorganization Act (comparable to chapter 11 in Bankruptcy Act in the USA). Up to 50% of the firms have failed during the reorganisation program while the rest of the firms continued operating. This study examines whether the expected weak predictive ability of accrual-based financial ratios (Hypothesis 1) can be increased by using cash-based (manipulation-free) cash flow ratio (Hypothesis 2). In addition, it is examined whether non-financial variables either alone (Hypothesis 3) or in conjunction with financial ratios (Hypothesis 4) are able to predict firm failure more accurately than models based on financial information solely. Logistic regression analysis is used to test the four hypotheses. Empirical evidence supports all hypotheses.

Keywords: reorganisational failure; entrepreneurial firms; non-financial characteristics; financial information; entrepreneurship; failure prediction; small firms; firm reorganisation; Finland; accrual-based financial ratios; cash flow ratio.

DOI: 10.1504/IJMED.2015.070099

International Journal of Management and Enterprise Development, 2015 Vol.14 No.2, pp.144 - 171

Available online: 26 Jun 2015 *

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