Academic journal article Academy of Accounting and Financial Studies Journal

The Use of Accounting and Financial Ratios to Predict Failure: The Case of Jordan

Academic journal article Academy of Accounting and Financial Studies Journal

The Use of Accounting and Financial Ratios to Predict Failure: The Case of Jordan

Article excerpt

INTRODUCTION

There are many studies of statistical of failure prediction models have described in the literature, testing of whether such methodologies work in practice are lacking. This paper study and examines the performance of the same companies with solvency for predicting bankruptcy and comparison in both models. These models are a model suggested for measuring the values of financial performance (Al-Kassar & Soileau, 2012), and applying the financial failure model (Z-score) used by Taffler (1983). In addition, the results have correlated and tested, in order to classify and rank company values.

Since the development of the Z-Score, financial innovation has paved the way for further development of corporate bankruptcy prediction models. The option-pricing model developed by Black and Scholes in 1973 and Merton in 1974 provided the foundation upon which structural credit models were built. KMV (Kealhofer, McQuown and Vasicek), Now Part of Moody's Analytics Enterprise Risk Solutions, was the first to commercialize the structural bankruptcy prediction model in the late 1980s. Miller (2009) noted, "The Distance to Default is not an empirically created model, but rather a mathematical conclusion based on the assumption that a company will default on its financial obligations when its assets are worth less than its liabilities. It is also based on all of the assumptions of the Black-Scholes option pricing model, including for example, that asset returns are log-normally distributed".

There are many dimensions upon which to measure the performance of a credit scoring system, but the most relevant way to compare models with different sample sets is by measuring the models' ordinal ability to differentiate between companies that are most likely to go bankrupt from those that are least likely to go bankrupt (Bemmann, 2005).

Many governments are interested in establishing investment projects because of the importance of the role government play in the efforts to build a stable economic base. This reflected in many developing countries, which are looking for opportunities to improve their political, economic, social and cultural aspects. Generally, projects need a lot of money and resources to finance them. Therefore, finding and using the best method to control these investments and resources to achieve development objectives in different fields and avoid insolvency is of great importance. Gerdin (2005), states that Management Accounting Systems (MAS) can considered as "those parts of the formalized information system used by organizations to influence the behavior of their managers that leads to the attainment of organizational objectives". Managers in some organizational contexts are likely to benefit from accounting information that is detailed and issued frequently, whereas MAS information in other contexts tends to be general rather than detailed, and issued less frequently (Gerdin, 2005).

The empirical literature reviewed by Chenhall (2006), for example, indicates that non-financial performance measures are more widely adopted in Just In Time (JIT) and Total Quality Management (TQM) settings. Other studies like Abdel-Kader & Luther (2008) have highlighted the need for additional research to increase our understanding of organizational and environmental factors that explain the development of management accounting systems, including the use of non-financial measures. Accounting information plays an important role in individual and corporate decision-making. In particular, a fundamental use of accounting information is to help different parties make an effective decision concerning their investment portfolios. Much of the accounting literature assumes that accounting and financial reporting in a country is a function of its environment (Belkaoui & AlNajjar, 2006). The management accounting literature reveals that changes in the environment and the technology of a company can lead to new decision making and control problems (Abdel-Maksoud et al. …

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