The Relevance of Employee-Related Ratios for Early Detection of Corporate Crises

Mario Situm

Abstract


The purpose of this study was to analyse whether employee-related ratios derived from accounts have incremental predictive power for the early detection of corporate crises and bankruptcies. Based on the literature reviewed, it can be seen that not much attention has been drawn to this task, indicating that further research is justified. For empirical research purposes, a database of Austrian companies was used for the time period 2003 to 2005 in order to develop multivariate linear discriminant functions for the classification of companies into the two states; bankrupt and non-bankrupt, and to detect the contribution of employee-related ratios in explaining why firms fail. Several ratios from prior research were used as potential predictors. In addition, other separate ratios were analysed, including employee-related figures. The results of the study show that while employee-related ratios cannot contribute to an improvement in the classification performance of prediction models, signs of these ratios within the discriminant functions did show the expected directions. Efficient usage of employees seems to play an important role in decreasing the probability of insolvency. Additionally, two employee-related ratios were found which can be used as proxies for the size of the firm. This had not been identified in prior studies for this factor.


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