Is The Scaling Measure Used For Cash Flows Important In Predicting Financially Distressed Firms?

Abstract

This paper attempts to determine whether the measure used to scale the three net cash flows reported on a statement of cash flows affects binary financial distress prediction results. The results of this study suggest that the scaling measure used does affect the incremental predictive ability of each cash flow. Results indicate that tone should scale cash flow from operating activities by current assets, cash flow from investing activities by sales, and cash flow from operating activities by owners equity.