BEAM078 Applied Empirical

Accounting and Finance

BEFM022 Quantitative
Research Methods
Module Leader: Dr Anthony Wood Email: [email protected]
Workshop Tutor: Dr Wanling Rudkin Email: [email protected]
 Lecture 5
Academic Conduct and Assignment Focus
 Part 1
Academic Honesty
 Academic Honesty

Our academic community

As students at Exeter, you are part of an Internationally

respected academic community.

We expect the highest standards of academic honesty, source

acknowledgement and referencing from our students
 Academic Honesty
What is ‘academic honesty’?

Academic honesty is fundamental to the values promoted by the University. (TQM, Chapter 12.2.1)

In all your work, we expect you to uphold the highest standards of academic honesty & integrity.

You are awarded credit for your own knowledge, skills and viewpoints.

Correctly referencing your work is one way you can demonstrate your academic skill and depth of knowledge.
 Academic Honesty
What is an academic offence?

Offences come in many forms, including:

• Poor Academic Practice – Failure to reference correctly, poor paraphrasing, secondary referencing.
• Plagiarism – Intentionally trying to pass off someone else's work/thoughts/ideas as your own.
• Collusion – Working together on an individual assignment, sharing answers during assessment.
• Coercion - gaining academic advantage by putting pressure on another student or member of staff.
• Contract Cheating – Using Chatbots, or having any 3rd Party complete all or part of your work.
• Fabrication & Falsification - Creating false data, analysis, documents or references.

Depending on the severity of the offence, penalties will range from a warning letter for minor PAP offences, to
expulsion from the university with zero credit in severe cases.

Any concerns in this area (including a high Turnitin score, lack of paraphrasing or copying from other sources)
could result in a direct referral to the Academic Conduct team.
 Academic Honesty
How do we ‘detect’ academic offences?

• All work submitted is scanned by Turnitin

• Every piece of work that is graded has a Turnitin report showing a % similarity score

• Your tutors, lecturers and markers will check your Turnitin scores

• Markers recognise similarities between submissions (including clusters of work that are ‘too similar’)

• We know the literature, theory and concepts (so we recognise mistakes or inaccuracies)

• We can compare your work with the work of any other student, or compare all work you have submitted
(formative & summative)
 Academic Honesty
In general, you are risking it if…

• It is not completely clear whether information, data or ideas are your own or those of another individual (published or
not, online or offline).

• You paraphrase or summarise information, data, ideas or words from a source without including an in-text citation
acknowledging the source.

• Your referencing is inaccurate and does not allow the reader to identify where your information/evidence has come from.

• You submit an assignment that is identical or very similar to your previously submitted work (this is called ‘self-
plagiarism’).

• You falsify or fabricate data that you use in an assignment.

• You submit work that has been written by someone else (e.g., a friend, a graduate or a service you paid for).
 Academic Honesty
More than just compliance

Transparency
Authority and Credibility
• we can see where your information
and ideas have come from Higher grades
• you can show you’ve taken your
evidence from the best and most
• others can undertake further reliable places
• following academic
reading on a topic conventions will secure
• we can see you’ve properly researched higher grades
• you can avoid accusations of your topic
plagiarism
 Academic Honesty
What is referencing?

“The basic principle of referencing is to support and identify the

evidence you use in your assignments.”

(Neville, 2016)

Neville, C. (2016). The Complete Guide to Referencing and Avoiding Plagiarism. McGraw-Hill Education
 Academic Honesty
Paraphrase? or directly quote?

• If you want to use information word for word, you must use quotation marks
• When directly quoting a source, you need to cite and include a page number

• However, try not to use quotes too often

• Quotations are generally best for definitions and quotations from respected authors talking about their own
work
• Instead paraphrase, and rewrite in your own words
• Paraphrasing is not just changing one or two words

NOT Appropriate
 Academic Honesty
When in-text citations are needed

In-text citations should appear in parentheses shortly after you refer to, quote or make use of a source, or
should be embedded within your sentence when you are using information from a source.

Direct quotes:
Bloggs (2022) claims that “X is not Y” (p. 167).
Recent research shows that “X is not Y” (Bloggs, 2022. p. 167).

Paraphrasing should be used when no single page reference is applicable (i.e. summarising):
Research shows that X may often be different to Y (Bloggs, 2022).
 Academic Honesty
Secondary citations

Secondary references are needed if you read about someone’s work, rather than reading the original work

For example, if you’re reading a 2015 journal article by Smith where she refers to a useful 2001 article by
Dobson:

DON’T write: Dobson (2001) did some useful research on climate change.
INSTEAD, write: In 2001 Dobson conducted valuable research on climate change (as cited in Smith, 2015, p. 41).

THEN include only the Smith article in your reference list.

EVEN BETTER: find and read the Dobson article and cite it directly! This shows you are making your own
judgement on their work, not relying on someone else’s interpretation
 Academic Honesty
When should you reference?

Direct quotes Paraphrased text, ideas or

theories
(exact words)
Reference
them all

Statistics, definitions or Charts, images and photos

examples
Part 1: Academic Honesty
Academic Honesty
Every in-text citation needs a corresponding entry in a Reference List that appears at the end of your assignment.
Do not include sources that you did not reference in the text.

Journal Youtube

Book Online image (& corp website)

Course material (ELE or Teams) News article

 Academic Honesty
Self Plagiarism

Re-using work from another assignment is not allowed

• This includes copying and pasting sections from a previous essay you have written

There are some exceptions to this but your module lead will advise you of this:
• Portfolio submissions
• When asked to reflect on group/individual work
• Resubmission – only if you explicitly told you can correct/amend your original work
 Academic Honesty
Checking Your Work

• Turnitin matches your work to other sources within its database. However a high percentage match, does
not mean that your work is problematic

• Turnitin just matches text so the cover sheet, assignment questions, quotations and references lists will often
match

• Look out for large sections which show an over-reliance on someone else’s words and see if you can re-write
this better in your own words

• You can submit draft work to BART/ELE in advance to view your Turnitin report. This can help you to spot
areas of concern
 Academic Honesty
Using Turnitin

• Turnitin is a useful tool allowing you to check your submission for originality (excluding exams)

• It will check your assignment against its database and look for similarity

• You will be able to view a report giving you a % similarity match

• You can submit your work as many times as you like on BART/ELE

• However, you only get 2 Turnitin reports

• This means that you can:

• check a draft - see the report - resubmit an updated draft - check your Turnitin report again
 Academic Honesty
Turnitin Myths

Myth #1: “Turnitin identifies plagiarism”

Wrong. Turnitin is just a tool that matches text. Judgement is still needed

Myth #2:“Anything under 30% match is fine”

Wrong: A paper under 30% could still be plagiarism
May not be picking up all text
May be poor practice ‘patchwriting’
Plagiarised sources may not be in Turnitin database (pending publications, other student submissions, sample
dissertations, self-plagiarism etc)

Myth #3:“You should try and get a match of 0%”

• Wrong: That’s virtually impossible!
• Matches header sheets, reference lists and assignment titles
• May have matched subject specific terms, brand names, stats or sample data
• May be correctly cited quotations
 Academic Honesty
Examples
• Some matching is always expected

For example: company information/statistics; basic definitions; list of references; essay title or assignment details;
cover sheet etc. These are not concerning.
Example 1
Text taken word-for-word from a
source without attribution
Example 2 Poor paraphrasing. Possible attempt
to frustrate TurnItIn?

No in-text citation given

Example 3 Secondary referencing

Small changes to the text

Student has misrepresented someone else’s literature review as their own

 Example 4

Reference
missing for the
graph (it is not
the student’s
own graph
Example 5

This kind of matching is not concerning

The case was dropped.
 Example 6

Whole sentences match

Student has used quotation marks

The sources are (albeit incorrectly – single instead of
indicated (albeit not double quotes)
in APA7 style) Student Warned.
 Example 7: A case of collusion amongst two students

The paragraphs match very closely

Student A Student B

Small changes to the text

The match does not show up in Student B’s report

TurnItIn reports are generated sequentially. Student B submitted first; thus,

Student A’s submission matched to Student B’s but not the other way round.
 Academic Honesty
Useful Links

• Course: Postgraduate Development Module (BSDM100_A_12_202425)

(exeter.ac.uk)

• Cite Them Right - Home (oclc.org)

• Style and Grammar Guidelines (apa.org)

• Guidance for students on use of generative AI here (how to acknowledge use) and
here (how to use critically)
 Part 2
Academic Quality
 Academic Quality
Academics are a unique breed of Human Being!

What percentage of your school friends went to or go to university?

What percentage of your university friends went on to study a masters

degree?

How many of your current friends do you think will do a PhD?

I often wondered about this, so I collected some data from various

educational resources in the UK…
Academic Quality
 Academic Quality

Estimated Academic Workforce in UK = 0.3% x 65million = 195,000

 Academic Quality

Business Schools

ALL UK University Total

Academic Staff 15,110

0.024% of Population

Source: Royalsociety.org
 Academic Quality
Hierarchy of Academia

Associate Professor

?
 Academic Quality
Referencing

• University of Exeter has many guides on how to correctly reference your work

• Despite the wealth of referencing guidance, none of these are particularly good at stating what you
should be referencing.

• The quality of articles and papers that you cite has a direct association with the quality of your own
work.

e.g.
• A paper/assignment that just quotes Wikipedia and Investopedia vs a paper/assignment that references
and builds upon high quality ground-breaking research
 Academic Quality

Publications
• Academic research staff are required to produce research output
• e.g. Journal Articles (research papers).

• A designated number of research papers are required to be published within a

given timeframe.
• Typically this timeframe relates to employment status or the REF cycle.

• Must be to a particular standard

• Published through peer-reviewed journals
 Academic
Typical Quality Process
Publication/Submission

Publication Process

Source: www.sepnet.ac.uk
 Academic Quality
Academic Journals
• Academic journals are a collection of academic papers
• Commonly 4 issues per years containing 5-10 papers

• All journals are assigned a rank according to the quality and influence of the
papers which the journal contains.

• In the UK we use the Academic Journal Guide (AJG) 2021 to denote rankings
• Published by the Chartered Association of Business Schools (CABS)

• The higher the journal ranking, the better quality and influence of the journal –
and the academic papers within.
 Academic Quality
Some Leading Journals in Accounting and Finance

• Journal of Finance (JoF)

• Journal of Accounting Research (JAR)
• The Accounting Review (TAR)
• British Accounting Review (BAR)
• Accounting and Business Research (ABR)
• European Accounting Review (EAR)
• Journal of Business Finance and Accounting (JBFA)

Each Journal will have a “volume” number and an “Issue” number e.g.

Derrien, F., and Kecskes, A. (2013). The Real Effects of Financial Shocks: Evidence from Exogenous Changes in Analyst
Coverage. Journal of Finance, Vol. 68 (4), p1407-1440.

The article can be found in JoF Volume 68, Issue 4. (page 1407-1440)
 Academic Quality
ISSN FIELD JOURNAL TITLE AJG 2018 AJG 2015 ABS 2010 ABS2009
0001-4826 ACCOUNT Accounting Review 4* 4* 4 4
0361-3682 ACCOUNT Accounting, Organizations and Society 4* 4* 4 4
0165-4101 ACCOUNT Journal of Accounting and Economics 4* 4* 4 4
0021-8456 ACCOUNT Journal of Accounting Research 4* 4* 4 4
0823-9150 ACCOUNT Contemporary Accounting Research 4 4 3 3
1380-6653 ACCOUNT Review of Accounting Studies 4 4 4 4
0001-3072 ACCOUNT Abacus 3 3 3 3
0001-4788 ACCOUNT Accounting and Business Research 3 3 3 3
0888-7993 ACCOUNT Accounting Horizons 3 3 3 3
0278-0380 ACCOUNT Auditing: A Journal of Practice and Theory 3 3 2 2
1050-4753 ACCOUNT Behavioral Research in Accounting 3 3 3 3
0890-8389 ACCOUNT British Accounting Review 3 3 3 3
0963-8180 ACCOUNT European Accounting Review 3 3 3 3
0810-5391 ACCOUNT Accounting and Finance 2 2 2 2
1744-9480 ACCOUNT Accounting in Europe 2 2 1 1
1467-0895 ACCOUNT International Journal of Accounting Information Systems 2 2 1 1
1090-6738 ACCOUNT International Journal of Auditing 2 2 2 2
1832-5912 ACCOUNT Journal of Accounting and Organizational Change 2 2 1 1
0967-5426 ACCOUNT Journal of Applied Accounting Research 2 2 2 2
1528-5350 ACCOUNT Management Accounting Quarterly 1 1 1 1
2049-372X ACCOUNT Meditari Accountancy Research 1 1 1 1
0114-0582 ACCOUNT Pacific Accounting Review 1 1 1 1
0884-0741 ACCOUNT Research in Governmental and Non-Profit Accounting 1 1 1 1
 Academic Quality
Reference sources ranked
Source Peer Reviewed? Quality

AJG Rated 4* Journal YES Recognised world-wide as exemplars of excellence

AJG Rated 4 Journal YES The most original and best-executed research

AJG Rated 3 Journal YES Original and well executed research papers and are highly regarded

AJG Rated 2 Journal YES Original research of an acceptable standard

AJG Rated 1 Journal YES Research of a recognised, but more modest standard

Non-Rated Journals YES Probably of Poor Quality

Books NO Varies

Practitioner Publications NO Often detailed and inciteful - but may be subject to hidden agendas
Practitioner Web Articles NO Less detailed and opinionated - may be subject to hidden agendas
News / Announcements NO Reputable? Beware "Fake News" !!
Wikipedia / Investopedia NO Often Inaccurate. Many pages can be freely edited
 Academic Quality

• Never forget that behind

every paper or publication
is a human face.

• They are academics like

myself and your other William Beaver Edward Altman Sofie Balcaen
lecturers, working at a
university somewhere, and
are often found via a quick
internet search.

James Ohlson Richard Taffler Vineet Agarwal

 Part 3
Finding Academic Papers
 Finding Academic Papers
References
Armstrong, C., Barth, M., Jagolinzer, A., & Reidl, E. (2010). Market reaction to the adoption
of IFRS in Europe. The Accounting Review, 85(1), 31-61.
Ashbaugh, H., LaFond, R., & Mayhew, B. (2003). Do non-audit services compromise auditor
independence? Further evidence. The Accounting Review, 78(3), 611-639.
Ball, R., Kothari, S. P., & Robin, A. (2000). The effect of international institutional factors on
properties of accounting earnings. Journal of Accounting and Economics, 29(1), 1–51.
Barker, A., & Jones, A. (2011a, November 18). EU watchdog to soften accountancy reform.
Financial Times.
Barth, M.E., Konchitchki, Y., & Landsman, W.R. (2013). Cost of capital and earnings
transparency. Journal of Accounting and Economics, 55(2-3), 206-224.
Bell, T. B., Causholli, M., & Knechel, W. R. (2015). Audit firm tenure, non‐audit services, and
internal assessments of audit quality. Journal of Accounting Research, 53(3), 461-509.
Cameran, M., Francis, J.R., Marra, A., & Pettinicchio, A. (2015). Are there adverse
consequences of mandatory auditor rotation? Evidence from the Italian experience. Auditing:
A Journal of Practice & Theory, 34(1), 1-24.
 Finding Academic Papers
Author(s) References
Armstrong, C., Barth, M., Jagolinzer, A., & Reidl, E. (2010). Market reaction to the adoption
of IFRS in Europe. The Accounting Review, 85(1), 31-61.
Year
Ashbaugh, H., LaFond, R., & Mayhew, B. (2003). Do non-audit services compromise auditor
independence? Further evidence. The Accounting Review, 78(3), 611-639.
Paper Title Ball, R., Kothari, S. P., & Robin, A. (2000). The effect of international institutional factors on
properties of accounting earnings. Journal of Accounting and Economics, 29(1), 1–51.
Barker, A., & Jones, A. (2011a, November 18). EU watchdog to soften accountancy reform.
Financial Times.
Journal (in italics)
Barth, M.E., Konchitchki, Y., & Landsman, W.R. (2013). Cost of capital and earnings
transparency. Journal of Accounting and Economics, 55(2-3), 206-224.
Journal Bell, T. B., Causholli, M., & Knechel, W. R. (2015). Audit firm tenure, non‐audit services, and
volume/issue/page internal assessments of audit quality. Journal of Accounting Research, 53(3), 461-509.
 Finding Academic Papers
Link to University Library Guide
Welcome - Library Induction UoE - LibGuides at University of Exeter
 Finding Academic Papers
Finding a paper if the source is known, e.g. from a papers’ list of references

Agarwal, V., & Taffler, R. J. (2007). Twenty-five years of the Taffler z-score model: does it really have predictive ability? Accounting and Business Research,
37(4), 285-300.
Agarwal, V., & Taffler, R. J. (2008). Comparing the performance of market-based and accounting-based bankruptcy prediction models. Journal of Banking and
Finance, 32(8), 1541-1551.
Altman, E. I. (1968). Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy. Journal of Finance, 23(4), 589-609.
Altman, E. I., & Eisenbeis, R. A. (1978). Financial Applications of Discriminant Analysis: A Clarification. Journal of Financial and Quantitative Analysis,
13(1), 185-195.
Altman, E. I., Haldeman, R. G., & Narayanan, P. (1977). ZETA analysis: A new model to identify bankruptcy risk of corporations. Journal of Banking and
Finance, 1(1), 25-54.
Aziz, M., & Dar, H. (2006). Predicting corporate bankruptcy: where we stand. Corporate Governance, 6(1), 18-33.
Balcaen, S., & Ooghe, H. (2006). 35 years of studies on business failure: an overview of the classic statistical methodologies and their related problems. The
British Accounting Review, 38(1), 63-93.
Beaver, W. (1966). Financial Ratios as Predictors of Failures. Journal of Accounting Research, 4(3)(Supplement), 71-102.
Part 3: Finding Academic Papers
Finding Academic Papers
Search library for journal title
Part 3: Finding Academic Papers
Finding Academic Papers
Part 3: Finding Academic Papers
Finding Academic Papers
 Finding Academic Papers
Searching for unknown papers – Business Source Complete

Coverage:

• Academic Journals
• Books
• Case Studies
• Conference Papers
• Newspapers
• Trade Publications
• …and more
 Finding Academic Papers
Searching for unknown papers – SSRN – Social Science Research Network
 Part 4
Bankruptcy Prediction
(Assignment Topic)
 Bankruptcy Prediction
Summary
• Provides students with a basic understanding of the key
developments within the field of bankruptcy/insolvency
prediction over the last half-century
• Introduces various methodologies
• Highlights current innovations

• Associated areas
• Corporate Finance
• Financial Markets and Systems
• Risk and Regulation in Banking
• Credit Risk
 Bankruptcy Prediction
Technical Terms
• Financial distress
• Where a company has difficulty meeting its financial obligations. Often leads
to bankruptcy/insolvency.

• Corporate failure
• When a company involuntarily ceases to exist (e.g. becomes bankrupt),
usually after a period of financial distress. Involves a formal/legal process.

• In the UK
• The term Bankruptcy relates to individuals
• The term Insolvency relates to companies

• In the US
• Bankruptcy relates to both companies and individuals
 Bankruptcy Prediction
Technical Terms
Insolvency – “The inability of a company to pay its debts”. Companies Act (2006).

(1) A company is deemed unable to pay its debts - [...]

(a) if a creditor (by assignment or otherwise) to whom the company is indebted in a sum exceeding £750 then
due has served on the company, by leaving it at the company's registered office, a written demand (in the
prescribed form) requiring the company to pay the sum so due and the company has for 3 weeks thereafter
neglected to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditor.
[Cash-flow insolvency].

(2) ...if the value of the company's assets is less than the amount of its liabilities, taking into account its
contingent and prospective liabilities”. [Balance sheet insolvency].
 Bankruptcy Prediction
Types of Bankruptcy
UK US
Individuals (Bankruptcy) Companies (Insolvency) Individuals (Bankruptcy) Companies (Bankruptcy)

Bankruptcy Orders Administration Chapter 7 (liquidation) Chapter 7 (liquidation)

Administrative Chapter 11
Debt Relief Orders
Receivership Chapter 13 (Similar to IVA) (reorganisation)

Chapter 12
Deeds of Arrangement (IVAs) Compulsory Liquidation
(farmers/fishermen)
Creditors’ Voluntary
Liquidation

Members’ Voluntary
Liquidation

Company Voluntary
Arrangement
Further information on US bankruptcy can be found here
http://www.uscourts.gov/services-forms/bankruptcy
Bankruptcy Prediction
US Chapter 11 Filings

Data sourced from the Lopucki Bankruptcy database

 0
1000
2000
4000
5000
6000

3000
1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015
UK Administrations

2016
Bankruptcy Prediction

2017

2018

2019

2020

2021

2022

2023
 Bankruptcy Prediction
Large retailers enter administration. NOT SAVED
 Bankruptcy Prediction
Large retailers enter administration. NOT SAVED
 Bankruptcy Prediction
Large retailers enter administration. NOT SAVED
 Bankruptcy Prediction
Large retailers enter administration. NOT SAVED
 Bankruptcy Prediction
Large retailers enter administration. NOT SAVED
Bankruptcy Prediction
High street future?
Bankruptcy Prediction
High street future?
 Bankruptcy Prediction
Large retailers enter administration. SAVED
 Bankruptcy Prediction
Large retailers enter administration. SAVED
 Bankruptcy Prediction
Large retailers enter administration. SAVED
 Bankruptcy Prediction
Large retailers enter administration. SAVED
 Bankruptcy Prediction
Economic Importance of bankruptcy prediction
• Implications for stakeholders
• Ripple / domino effect
• Identifying good/bad credit
• Government encouraging banks to lend
• Banks reluctant to lend unless good credentials
• If failure detected early – intervention - rescue
 Bankruptcy Prediction
Early “Theory”

Walter (1957) Liquid Reservoir

• Pool of liquid assets

Insolvency more likely to occur when

• The size of the reservoir is smaller
• The inflow of funds from operations is smaller
• The claims on resources by creditors is larger
• The funds flow required for business operations is larger and
• The variation of inflows, outflows and claims on the company is
higher
 Bankruptcy Prediction
Univariate Analysis
• Early single ratio studies: (Fitzpatrick, 1932; Merwin, 1942; Alexander, 1949)

• Beaver (1966) applied financial ratios solely to Insolvency prediction and found
that signs of insolvency could be detected up to five years before failure
Bankruptcy Prediction

• Beaver (1966) Accuracy.

• The “first test” (in parenthesis)denotes accuracies
based upon a cut-off points derived within the same
sample
• The “second test” refers to applying a cut-off point
derived from one sample upon a separate hold-out
sample.
 Bankruptcy Prediction
Multivariate Discriminant Analysis (MDA) of the 1970’s

Altman (1968) used MDA to successfully separate a sample of failed and non-failed firms
using a five variable function.
Seminal work leading to wide academic interest e.g. Deakin, 1972; Edminster, 1972; Blum,
1974; Taffler, 1984

The Altman Z-Score

Z = 1.2(WC/TA) + 1.4(RE/TA) + 3.3(EBIT/TA) + 0.6(MVE/TL) + 0.99(S/TA)

where
WC = Working Capital
TA = Total Assets
RE = Retained Earnings
EBIT = Earnings before interest and taxes
MVE = Market value of equity
TL = Total Liabilities
S = Sales
 Bankruptcy Prediction

Original Altman Z-Score.

Discriminating (separating)
bankrupt and non-bankrupt firms
via the Z-score model.

Z<1.8 = Bankrupt
1.8<Z<3.0 = “Grey Area”
Z>3.0 = Healthy
 Bankruptcy Prediction
Original Altman Z-Score.

Classification accuracy
 Bankruptcy Prediction
Taffler (UK) Z-score.
 Bankruptcy Prediction
Conditional Probability Models of the 1980’s (logit and probit)

• Ohlson (1980) applied the logit model and overcame several assumption
violations associated with MDA (see Balcaen & Ooghe (2006) for a discussion
of the problems).

• Other notable probability models include: Hamer 1983; Zmijewski, 1984;

Zavgren, 1985; Keasey and Watson, 1987

• Assigns probabilities – not scores

 Bankruptcy Prediction
Ohlson (1980)
 Bankruptcy Prediction
Artificially Intelligent Expert Systems
Artificially Intelligent Expert Systems (AIES) in the 1990’s

Technological developments allowed researchers to develop more complex models, e.g.

•Neural Networks (Odom & Sharda, 1990; Coats & Fant, 1993; Charitou et al., 2004)
•Genetic Algorithms (Back et al., 1996; Varetto, 1998)
•Recursive Partitioning (Joos et al., 1998)
 Bankruptcy Prediction
Literature thus far is statistically driven
• Ad-hoc design
• Arbitrary choice of technique/method/data
• No theoretical under-pinning
• Assessing model accuracy – single cut-off

Similarity of ratios / groupings

• Profitability
• Liquidity
• Size
• Gearing
 Bankruptcy Prediction
Contingent Claims (market) models of the 21st century

• The acquisition of KMV by Moody’s in April 2002 led to disclosure of

information regarding the methodology employed by the ratings agency
Moody’s-KMV
• A moderate number of academic studies have resulted from this disclosure
• The models are based on the options pricing formulae as presented by Black
and Scholes (1973) and Merton (1974)
• The model treats equity as a call option on a firms assets with a strike-price
equal to the face value of its liabilities
• The option expires at time T when the debt matures: if the assets are worth more than
the liabilities at time T then the option is exercised and the debt paid off. If the assets are
worth less than the liabilities at time T then bankruptcy proceeding are started.
• For more information see Hillegeist, S. A., Keating, E. K., Cram, D. P., & Lundstedt, K. G.
(2004). Assessing the probability of bankruptcy. Review of Accounting Studies, 9(1), 5-34.
 Bankruptcy Prediction
Jackson and Wood (2013) – Comparison of models.
 Bankruptcy Prediction
Jackson and Wood (2013) – Comparison of models.
 Bankruptcy Prediction
Recommended reading
• Beaver, W. (1966). Financial Ratios as Predictors of Failures. Journal of Accounting Research,
4(3)(Supplement), 71-102.
• Altman, E. I. (1968). Financial Ratios, Discriminant Analysis and the Prediction of Corporate
Bankruptcy. Journal of Finance, 23(4), 589-609.
• Ohlson, J. (1980). Financial ratios and the probabilistic prediction of bankruptcy. Journal of
Accounting Research, 18(1), 109-131.
• Balcaen, S., & Ooghe, H. (2006). 35 years of studies on business failure: an overview of the
classic statistical methodologies and their related problems. The British Accounting Review,
38(1), 63-93.
• Agarwal, V., & Taffler, R. J. (2007). Twenty-five years of the Taffler z-score model: does it
really have predictive ability? Accounting and Business Research, 37(4), 285-300.
• Agarwal, V., & Taffler, R. J. (2008). Comparing the performance of market-based and
accounting-based bankruptcy prediction models. Journal of Banking and Finance, 32(8),
1541-1551.
• Jackson, R., & Wood, A. (2013). The Performance of Insolvency Prediction and Credit Risk
Models in the UK: A Comparative Study. The British Accounting Review, 45 (3), 183-202
 Tasks

• Further writing tips prevalent to the assignment (and in general) can be

found here.

• Seminars relating to this lecture will be group presentations (10 minutes)

• The presentations will be regarding 4 key papers

• Groups will be decided in this week’s seminars. 4 groups per class. One
paper to discuss per group.
Building Blocks