A Behavioral Study of the Usefulness of Four Financial Ratios

Altman, 1968; Beaver, 1966; Daniel, 1969; Deakin, 1972; and Horrigan, 1966 have researched the usefulness of financial ratio information.' These authors defined usefulness as predictive ability.2 Predictive ability was measured by determining the statistical predictive relationship between financial ratios and some specified real world phenomenon, e.g., bankruptcy (Altman), business failure (Beaver, Daniel and Deakin) and long-term credit standing (Horrigan). In contrast, this study works with experienced bank personnel using financial ratios to make subjective predictions of bankruptcy.3 This research views bank credit evaluation as a probabilistic information processing problem. Bayes' theorem is used as a model of human information processing for this problem. The set of uncertain events consists of bankruptcy and nonbankruptcy. The items of information are financial ratios.4