Financial Statements as Sole Predictors of Financial Distress : The Need for New Financial Ratios

Four new ratios, that capture firms' Stability, Downside Risk and Audit Quality, are significant predictors of financial distress as evidenced by bankruptcy. Moreover, they improve substantially a logit based credit metric when combined with other classic ratios. A credit metric that comprises a combination of classic and "exotic" financial ratios is successful to predict financial distress up to five years prior to bankruptcy. The model is consistent and robust for In-Sample as well as Out of Sample tests