ABSTRACT
Laitinen, Teija (1993). The information content of alternative income concepts in predicting corporate failure. Acta Wasaensia No 35, 146 p.
The main interest of the study was to determine whether any incremental information is associated with alternative income concepts. The income concepts of focus and the depreciation methods applied when constructing them are as follows:
economic income - economic depreciation
published income - free depreciation
Committee for Corporate
Analysis-adjusted income - triple declining-balance depreciation
International Accounting
Standards-adjusted income - straight-line depreciation
The information content of these income concepts was tested by a prediction ability criterion. The event predicted was corporate failure.
Analysis of every income concept separately showed that they all have certain weaknesses which lead to misclassification of firms in failure prediction, i.e. none of them contains any incremental information with respect to the others. Thus, the following research hypothesis was defined: There are no statistically significant differences in the prediction ability of the income concepts studied.
The empirical results supported the hypothesis. Analysis of all four income concepts, made by using two different approaches, logit analysis and human judgment, revealed no significant differences in their prediction ability.
Teija Laitinen, Department of Accounting and Finance, Faculty of Accounting and Industrial Management, University of Vaasa, Raastuvankatu 31, FIN-65100 Vaasa, Finland.
KEYWORDS
Income concept, depreciation, incremental information, financial ratios, failure prediction.