Tax Debt as an Indicator of Companies’ Default: The Case of Slovakia
Kubicová, J., Faltus, S. (2014). Tax Debt as an Indicator of Companies’ Default: the Case of Slovakia. Journal of Applied Economics and Business, Vol 2, No. 4, 59-74.
16 Pages Posted: 28 Dec 2014 Last revised: 20 Jan 2015
Date Written: 2014
Scientific literature has proposed a number of indicators that are successful in predicted future of company’s default. Our study is focused to enrich of the literature by presenting data on the potential tax liability as a warning sign of future company’s default. Using the Receiver Operating Characteristic of curves and the values of Area Under Curve we measure and compare the resolution of the twelve ratio indicators that have in numerator the accounting data on income tax. From the twelve indicators, we have used three with the best-resolution as independent variables in the hazard multi-period logit model of prediction of company’s default. The research was done on the data of failed and healthy companies that are included in the financial statements from 82,572 companies in the Slovak Republic for the period 2003-2012. We found that although the best ratio indicators with income tax were ranked in terms of their distinctive capabilities in the first half of selected 49 benchmark indicators, they does not include the best under this criterion. However in terms of accuracy of prediction model, fiscal indicators came through better than indicators with the best resolution. Therefore, it is not possible to say that which model is better. It depends on what criterion is evaluated. The possibility of using tax indicators is thus a matter of the required characteristics of the model.
Keywords: Bankruptcy prediction; Tax accounting variables; Ability of resolution; ROC curves; Hazard multi-period logit model
JEL Classification: G33, H25, B23
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