The Relevance of Stock and Flow-Based Reporting Information In Assessing the Likelihood of Emergence from Corporate Financial Distress |
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| Authors: | Gregory D Kane Frederick M Richardson Uma Velury |
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| Institution: | (1) Department of Accounting and Management Information Systems, University of Delaware, Newark, Delaware, 19716;(2) Department of Accounting, Virginia Polytechnic Institute and State University, College of Business, Blacksburg, VA, USA |
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| 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. |
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| Keywords: | normal earnings abandonment value financial distress cash realization |
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