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otherwise similar non-issuing firms face comparable yields on their loans, even after adjusting for default risk and accounting
for potential endogeneity between the various components of the loan contract. Alon Brav : 2006
c. Earning Change
In Mujeeb-u-Rehman-Bhayo 2011:2 there is a statement from Jordan et al. 2009 and Ou and Penmen 1989 found that
a larger proportion of the variation in EP ratios among companies is explained by traditional financial statement ratios.
Published financial statements are a principal source of firm-specific information concerning the result of a firm‟s
wealth creating activities i.e., sales, production, investment and financing activities. These financial statements present
extensive and low-cost information that assists external monitoring by outside stakeholders such as shareholders and
banks, and provide a foundation for various contractual arrangements such as private lending agreements and
employment contracts.
d. Future Earning
The stock price and the earnings per share determine the value of the ratio. PE increases when investors are willing to
pay more per unit of earnings while the earnings remain stable.
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PE also grows when both the stock price and the earnings per share increase, however, the increase of stock price must be
sharper than the increase in the earnings per share. Another scenario of increasing PE take place, when stock price remain
stable despite there is a decrease in the earnings per share. The price earnings ratio does not change when there is a balance
between the growth of the stock price and the earnings per share. Marian Vorek :2009
e. Company Failure or Bankruptcy
Bankrupt firms has indicated their worse financial position for a considerable time before they actually went
bankrupt It is widely believed that profitability and liquidity ratios can predict bankruptcy to a certain extent I also proved
that the Japanese bankrupt firms had indicated their worse financial position for a considerable time before they actually
went bankrupt Cindy Yoshiko Shirata: 1998
Failure is defined as the inability of a firm to pay its financial obligations as they mature. Operationally, a firm is
said to have failed when any of the following events have occurred: bankruptcy, bond default, an overdrawn bank
account, or nonpayment of a preferred stock dividend.
