A study of the incremental power of using Statement of Cash Flows ratios in predicting companies’ failure in Malaysia

Abstract

The main purpose of this study is to test whether adding statement of cash flow data to accrual ratios can increase the prediction power of the company failure model applied to Malaysian listed companies. As a starting point, we apply Multiple Discriminant Analysis (MDA) to develop a brand new company failure prediction model. Our empirical evidence shows that a combined use of ratios derived from income statement (I/S), balance sheet (B/S) and statement of cash flow provides a better predicting power than only using I/S and B/S. Our results show high successful prediction rates of our model. Tested on holdout samples, we achieved 91.07 percent for a one-year prediction and 89.29 percent for a two-year prediction.