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- Title
Capitalization of Leases and the Predictability of Financial Ratios: A Reply.
- Authors
Elam, Rick
- Abstract
The original article by the author reported the effects of changing data on the predictive ability of financial ratios. Much of what Professor E.I. Altman suggests involves the comparison of alternative models using lease data. Altman implies that the research failed to extend sufficient attention to the possibility of equality of relative leases between bankrupt and non-bankrupt firms. Obviously, if bankrupt and non-bankrupt firms have the same relative amount of long-term lease commitment, the comparison of ratios with lease data to ratios without lease data will end in a draw. One of the problems in undertaking research of the type being reported was availability of data. Locating failed firms which had reported leases in their financial statements limited the size of the sample. Additionally, the necessity of using data for 5 consecutive years imposed the problem of a changing economic environment over the 5 years in question. No new ratios were invented for this research because the objective was to take a standard model specification and compare its ability to predict bankruptcy with and without the capitalized data.
- Subjects
COMMERCIAL leases; CORPORATE finance; FINANCIAL ratios; LEASES; BANKRUPTCY; BUSINESS enterprises; QUADRATIC equations; FINANCIAL statements; ECONOMIC forecasting
- Publication
Accounting Review, 1976, Vol 51, Issue 2, p413
- ISSN
0001-4826
- Publication type
Article