A study on effects of cash flow patterns and auditors’ opinions in predicting financial distress

Abstract: Bankruptcy has been one of the most important issues among investors in stock market and there are literally different techniques for predicting bankruptcy. In this paper, we study on effects of cash flow patterns and auditors’ opinions in predicting financial distress on some 80 selected firms traded on Tehran Stock Exchange over the period 2005-2011. In this study, the combination of cash flow patterns represent firm’s resource allocations and operational capabilities interacted with their strategy choices. In additions, predictions about each individual cash flow components, operational, investment, financial, are derived from economic theory, which forms a basis for the life proxy. We use cash flow patterns in the decline stage and compare the results with auditors’ opinions. The results indicate that cash flow patterns could predict financial distress companies in Iran. In addition, the effective cash flow patterns in predicting financial distress is more than auditors’ feedbacks.

How to cite this paper

 Namvar, F., Makrani, K & Karami, A. (2013). A study on effects of cash flow patterns and auditors’ opinions in predicting financial distress.Management Science Letters , 3(7), 1863-1868.

Refrences

Altman, E. I. (1968). Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. The journal of finance, 23(4), 589-609.

Beaver, W. H. (1968). Alternative accounting measures as predictors of failure. The Accounting Review, 43(1), 113-122.

Fulmer, J. G., Moon, J. E., Gavin, T. A., & Erwin, M. (1984). A bankruptcy classification model for small firms. Journal of Commercial Bank Lending,66(11), 25-37.

Gordon, M. J. (1971). Towards a theory of financial distress. The Journal of Finance, 26(2), 347-356.

Hertzel, M. G., Li, Z., Officer, M. S., & Rodgers, K. J. (2008). Inter-firm linkages and the wealth effects of financial distress along the supply chain. Journal of Financial Economics, 87(2), 374-387.

Hoshi, T., Kashyap, A., & Scharfstein, D. (1990). The role of banks in reducing the costs of financial distress in Japan. Journal of financial economics, 27(1), 67-88.

Opler, T. C., & Titman, S. (1994). Financial distress and corporate performance. The Journal of Finance, 49(3), 1015-1040.

Sun, J., & Li, H. (2008). Listed companies’ financial distress prediction based on weighted majority voting combination of multiple classifiers. Expert Systems with Applications, 35(3), 818-827.

Sun, J., & Li, H. (2009). Financial distress early warning based on group decision making. Computers & Operations Research, 36(3), 885-906.

Xiao, Z., Yang, X., Pang, Y., & Dang, X. (2012). The prediction for listed companies’ financial distress by using multiple prediction methods with rough set and Dempster–Shafer evidence theory. Knowledge-Based Systems, 26, 196-206.