Predictive Ability of Financial Ratio to Corporate Bankruptcy: An Empirical Analysis

Abstract

—Business failure is the most serious financial dilemma and attracted high attention from market participants[4].Based on the research that is widely explored by related experts and scholars and according to the sample of US failed firms and non-failed firms in 2009 and 2019 selected from the dataset of WRDS, this paper uses financial ratios from the public financial statements of listed companies to conduct a study on the prediction of the probability of company bankruptcy.The analysis shows that some financial ratios, such as the ratios of shareholder equity to total liabilities and net income to total assets, have better predictive capabilities, and that the ratio of sales to total assets may not be an important indicator of predicting corporate insolvency.