The present study adds to our understanding and knowledge of financial distress predictions regarding the usefulness of financial ratios in the late stages of the financial distress process. The study contributes to previous research by generating information concerning: (1) the behavior and usefulness of single financial ratios in short-term financial distress prediction when the effect of each different financial distress process stage is considered; (2) the effects of recognition of the financial distress process stage on the financial distress prediction model. The time horizon for prediction is less than one year, and the empirical data consist of financial statement information from 106 distressed firms undergoing reorganization and their matched counterparts for 2003-2007. To analyze the effects of the specific distress process stage, the sample has been divided into two groups according to the date of application for reorganization: the first group of businesses applied for reorganization between 1 and 182 days after the closing of accounts, and the second group between 183 and 365 days after that point. The study findings provide evidence that the financial distress process stage affects the classification ability of single financial ratios and financial distress prediction models in short-term financial distress prediction. The study shows that the auditor's GC task could be supported by paying attention to the financial distress process stage. The implications of these findings for auditors and every stakeholder of business firms are considered.
Liiketaloudellinen Aikakauskirja, 2012, Issue 1, p. 41-69