Predicting financial distress using financial and non-financial variables

Abstract

This study attempts to clarify whether using a hybrid model based on non-financial variables and financial variables is able to provide a more accurate company financial distress prediction model than using a model based on financial variables only. The relationship between the model test results and the De la Rey K-Score for the subject companies is tested, employing Cramer’s V statistical test. A movement towards a Cramer’s V value of one indicates a strengthening relationship, and a movement towards zero is an indication of a weakening relationship. Against this background, further empirical research is proposed to prove that a model combining financial variables with true non-financial variables provides a more accurate company distress prediction than a financial variable-only model. The limited evidence of a strengthening relationship found is insufficient to establish the superiority of the proposed model beyond reasonable doubt.