Financial Measures to Identify Financial Distress Risk of Corporations

Abstract

The prospect of economic failure is of grave concern for an on-going business. Using empirical evidence, many researchers promote ad hoc approaches to identify potential financial distress. In this study, we evaluate and then advocate financial measures based on sound financial theory of a firm. In addition, we examine a major corporate bankruptcy using these measures and find that these measures in combination with the traditional financial ratios do provide insights into a firm’s deteriorating financial position.