Abstract
This study examined the usefulness of the cash-based interest coverage ratio (CICR). It also verified the usefulness of accrual-based interest coverage ratio (AICR), which is used as a criterion for exiting insolvent companies. This paper analyzed whether the value relevance of earnings to stock price differs according to various interest coverage ratios. The CICR is measured by dividing the cash generated from operations by the interest payments. AICR is measured by operating income divided by interest expenses. The research model for the hypothesis test of this study is based on the Ohlson model, which has been used for the test of stock value relevance in many previous studies. As a result of the empirical analysis, the CICR is used as useful information by the investors in the capital market. CICR is used as useful information in the capital market as an indicator of sustainability of profits. This study suggests that supervisors and financial institutions can make rational decision-making if they consider AICR and CICR as criteria for exiting insolvent companies. The contribution of this study was to suggest that the CICR can be a useful indicator for determining whether a company is insolvent due to its relatively low forecast error and high predictability.
Highlights
The purpose of this study is to analyze the effect of accrual-based interest coverage ratio (AICR) and cash-based interest coverage ratio (CICR) on the relationship between net profit and stock price
As a result of the empirical analysis, if the CICR is less than 1, it has a significant negative effect on the stock price itself, but it has a significant positive effect on the additional value related to the net profit. This result implies that the CICR is used as useful information by the investors in the capital market because the CICR is relatively low forecast error and relatively predictable
It implies that the CICR is used as useful information in the capital market as an indicator of sustainability of profits
Summary
The purpose of this study is to analyze the effect of accrual-based interest coverage ratio (AICR) and cash-based interest coverage ratio (CICR) on the relationship between net profit and stock price. The accrual profit information of accounting information has a positive relation with stock price [2,3]. The following variables further influence the earnings response coefficient for the stock price of accrued earnings. Debt ratio, size, lost and profit firms, sustainability of earnings, growth, and earnings predictability have been shown to affect the earnings response coefficient for stock prices [4,5,6,7,8,9]
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