Review of Quantitative Finance and Accounting

, Volume 26, Issue 1, pp 5–22 | Cite as

The Relevance of Stock and Flow-Based Reporting Information In Assessing the Likelihood of Emergence from Corporate Financial Distress

  • Gregory D. Kane
  • Frederick M. Richardson
  • Uma Velury
Article

Abstract

A number of recent studies have shown that earnings information is less useful and value relevant when firms are financially troubled. This finding has given rise to the consideration of alternatives. In this paper, we examine the contributions of book value-based proxies (normal earnings and abandonment value) and flow-based proxies (earnings and operating accruals) to the assessment of the likelihood of emergence from financial distress. Our prior reasoning is that while book value-based proxies may provide information about potential future cash resources, flow-based proxies, because they capture the progress of reorganization efforts underway, as opposed to mere potential, should be relatively more useful in assessing the likelihood of emergence from distress. Our findings are consistent with this explanation. We document that the primary predictors of emergence are flow-based proxies—in particular, cash from operations, net of earnings.

Key Words

normal earnings abandonment value financial distress cash realization 
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Copyright information

© Springer Science + Business Media, Inc. 2006

Authors and Affiliations

  • Gregory D. Kane
    • 1
  • Frederick M. Richardson
    • 2
  • Uma Velury
    • 1
  1. 1.Department of Accounting and Management Information SystemsUniversity of DelawareNewark
  2. 2.Department of AccountingVirginia Polytechnic Institute and State University, College of BusinessBlacksburgUSA

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