Fraudulent Statements Disclosure And Financial Distress: A Discrete-Time Survival Analysis

Abstract

This study uses discrete-time survival analysis (DTSA) to examine the influence of fraudulent statements disclosure on the probability of financial distress not only in the initial period subsequent to disclosure, but future periods as well. Evidence indicates DTSA is superior to logistic regression and extends a richer depiction of the probability after a first-time fraudulent statement disclosure. After fraudulent statements disclosure, 24% of the reporting firms experienced financial distress in Year 1, with the hazard function declines progressively in subsequent years. We find total liability to total assets, directors and supervisors’ stock pledged ratio, and CPA (Certified Public Accountant) change are definitely linked to financial distress probability (p-value <0.05). A DTSA model not only includes financial ratios, but also considers corporate governance variables to produce more accurate classification than those of alternative models.