A Test Of Financial Ratios As Predictors Of Turnaround Versus Failure Among Financially Distressed Firms

Abstract

The objective of this study was to evaluate the usefulness of financial ratios to discriminate among financially distressed firms. The sample consisted of firms identified as distressed during the period 1970 to 1976. Each company was evaluated eight years subsequent to the year of sample entry and assigned to one of three groups according to its financial condition at that point in time. All models tested were biased in their misclassifications of the sample firms. While financial ratios have proved to be meaningful discriminators in prior studies utilizing choice-based sampling designs, these results suggest that they are not so useful in efforts to distinguish between failing firms that effect a turnaround and those that are unsuccessful in their remedial efforts.