Maureen F. McNichols of Stanford Business School and several co-authors have conducted a fascinating study regarding corporate bankruptcies. They have examined the usefulness of financial statement analysis as a tool for predicting bankruptcy. They analyzed data from 1962-2002 for thousands of publicly traded companies. They found that, over time, financial statement analysis (traditional ratio analysis and the like) became less useful as a means of predicting corporate bankruptcies. Note that the analysis was still quite useful, just not as effective at predicting bankruptcy as it was back in the early to mid-1960s. Why might that be the case? The scholars offer several suggestions. First, companies restate earnings more frequently today than they did in the 1960s. That would suggest a higher frequency of earnings manipulation of earnings today. Second, many tech companies spend a significant portion of sales on research and development. Those investments do not make it onto the balance sheet in the way that capital investments in property, plant, and equipment do. As a result, ratios become less useful in predicting bankruptcy. Finally, more firms have negative income today than in the early 1960s. When firms lose money in a particular year, it becomes much harder to predict what will happen to them in the following years. Yet, losses in a particular year don't necessarily mean a bankruptcy is in the future.
Showing posts with label bankruptcy. Show all posts
Showing posts with label bankruptcy. Show all posts
Friday, April 26, 2013
Tuesday, November 29, 2011
American Airlines Files Chapter 11
Posted on 5:37 AM by Unknown
Perhaps we should not be surprised that American Airlines' parent company has filed for bankruptcy protection. American remained the last of the legacy U.S. carriers not to have filed Chapter 11. All others had done so at one point or another. As a result, the other legacy carriers had been able to use Chapter 11 to restructure their balance sheet and modify their labor contracts significantly. American remained at a disadvantage because it had not been able to reduce labor costs and debt obligations as substantially as its rivals. To some extent, Chapter 11 offers the opportunity to level the playing field. It may seem strange to suggest that a firm may be compelled to file Chapter 11 in part because all its rivals have filed previously. Yet, that dynamic does exist in this industry. One should not come to the conclusion, however, that such a domino effect always exists. Clearly, Ford has managed to be very competitive, despite the fact that it was the only one of the Big Three not to engage in a government-aided bankruptcy restructuring.
Friday, September 30, 2011
Friendlys headed for bankruptcy
Posted on 4:04 AM by Unknown
News reports this morning indicate Friendly's restaurants may be headed for Chapter 11. If you have been to one of their locations lately, you know they often exhibit very slow service. Moreover, some locations clearly need a makeover. They have clearly lost share to places such as Panera and Chipotle, as well as other restaurants at which there is table service. Here's a suggestion for survival: why not exit the restaurant business and focus on ice cream? The brand stands for ice cream. They could shift to small locations, reduce fixed costs substantially, and do what they do best.
Friday, September 23, 2011
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