Classification of bankruptcy with cash flow information: Evidence from small size firms

Abstract

Corporate financial ratios have been debated in the past as the most importance measures in predicting corporate failure, yet gaps remain in the literature about cash flow information in classifying between bankrupted and non-bankrupted firms. This study test whether cash flow components is more useful in classifying bankrupted and non-bankrupted of small and unlisted firms in Spain. The results of this study suggest that cash flows components are superior to financial ratios for classifying small failed and non-failed companies with the logit model. Particularly, most failing firms, reduce or avoid paying dividend to their owner. This reduction or the absence of dividend payments as a proportion of total outflow is often related to either a significant decrease in the net operating inflow and/or an increase in the relative outflow to fixed charges resulting from increased external debt financing.