Second Doctoral Summer School in Management Accounting Financial statement analysis and insolvency forecast models: a proposal for local firms

Emiliano Cantoni
Understanding in time premonitory signals of a distress situation and taking actions to get out of these situations are financial management primary targets. Numerous contributions in accounting and finance have presented a plethora of studies about the Insolvency Forecast Models (IFMs) based on a statistical approach especially discriminant analysis, logit and probit techniques. The main issue sometimes seems to be that statistically meaning variables are not so meaningful in accounting. The
more » ... n accounting. The aim of this paper is to estimate construction and verify an IFM based on an alternative statistical approach to the discriminant analysis techniques. A specific model, descriptive and predictive, was developed to analyze the economic and financial conditions of the firms, comparing them with a reference group, through the financial statement analysis. The business distress was studied through financial statement ratios and through successive analysis of their distributions. Two fundamental dimensions were taken into consideration: the economic one (like profitability and growth) and the financial one (liability, capital structure, liquidity). The use of these two dimensions allowed to develop a graphical system in which it was possible to appreciate the positioning of every firm considered and their economic and financial situation. Moreover, a comparison among the firms was done in a static and dynamic context, in order to evaluate the changes in the financial risk and default likelihood.