A study on effects of cash flow patterns and auditors’ opinions in predicting financial distress

Abstract

Bankruptcy has been one of the most important issues among investors in stock market and there are literally different techniques for predicting bankruptcy. In this paper, we study on effects of cash flow patterns and auditors' opinions in predicting financial distress on some 80 selected firms traded on Tehran Stock Exchange over the period [2005][2006][2007][2008][2009][2010][2011]. In this study, the combination of cash flow patterns represent firm's resource allocations and operational capabilities interacted with their strategy choices. In additions, predictions about each individual cash flow components, operational, investment, financial, are derived from economic theory, which forms a basis for the life proxy. We use cash flow patterns in the decline stage and compare the results with auditors' opinions. The results indicate that cash flow patterns could predict financial distress companies in Iran. In addition, the effective cash flow patterns in predicting financial distress is more than auditors' feedbacks.

Assessing Variables Affecting the Financial Distress of State-Owned Enterprises in Indonesia (Empirical Study in Non-Financial Sector)

“…Good financial performance will reduce the level of financial distress. This finding is consistent with Namvar et al (2013) and differs from Widarjo and Setiawan (2009). Namvar et al found that the cash flow pattern significantly influenced the prediction of financial distress.…”

“…It indicates that operating cash flow is not a leading cause of financial distress in the automotive sector (Widarjo & Setiawan, 2009). In contrast, Namvar et al (2013) found that cash flows help predict financial distress. It indicates that cash flow is a determining factor in predicting the occurrence of financial difficulties for the 80 sampled companies listed in the Tehran Stock Exchange during the period from 2005 to 2011.There are differences in the level of financial difficulty between companies with different levels of cash flow (Kordestani et al, 2011).…”