Have Financial Statements Become Less Informative?
Evidence from the Ability of Financial Ratios to Predict Bankruptcy

WILLIAM H. BEAVER fbeaver@stanford.edu
Graduate School of Business, Stanford University, Stanford, CA 94305

MAUREEN F. MCNICHOLS fmcnich@stanford.edu
Graduate School of Business, Stanford University, Stanford, CA 94305

JUNG-WU RHIE
Graduate School of Business, Stanford University, Stanford, CA 94305

Abstract. Using a hazard model, we examine secular changes in the ability of financial
statement data to predict bankruptcy from 1962-2002. We identify three trends in
financial reporting that could influence predictive ability with respect to bankruptcy:
FASB standards, the perceived increase in discretionary financial reporting behavior, and
the increase in unrecognized assets and obligations. A parsimonious three-variable
model provides significant explanatory power throughout the time period, with only a
slight deterioration in predictive power from the first to the second time period. The
striking feature of the results is the robustness of the predictive models over a forty-year
period.
Keywords: Bankruptcy, accounting information, financial ratios.
JEL Classification: M41, G14, G33, C41