Banking

A Re-Evaluation Of Auditor~s Opinions Versus Statistical Models In Bankruptcy Prediction

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Executive Summary

Existent empirical evidence on the relative performance of auditors' going concern opinions versus statistical models in predicting bankruptcy is mixed. This paper attempts to add new reliable evidence on this important issue by conducting the comparison based upon an improved statistical model. The improved statistical model incorporates some new developments advocated by recent bankruptcy prediction research. First, the following non-traditional variables are added: a composite measure of financial distress, industry failure rate, abnormal stock returns, and market capitalization. Secondly, a hazard model is employed. The prediction ability of the hazard model with incorporation of non-financial-ratio variables is superior to that of auditors' going concern opinions in the holdout sample.

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