Cash Management Behavior and Failure Prediction

Abstract

The purpose of this study is to evaluate the information contained in static and dynamic inventory cash management models to predict failure in a sample of 41 small and middle‐sized Finnish bankrupt firms and their nonbankrupt counterparts. The results indicate that the estimates of the (scale) elasticity of cash balance with respect to the volume of transactions (approximated by net sales) is significantly lower for the failed firms. Furthermore, only the scale elasticity appears to be a statistically significant discriminating variable, and only in the first year before bankruptcy. This estimate remarkably increased the Lachenbruch validated classification accuracy based on traditional financial variables.