P ROBLEM STATEMENT
From an agency theory perspective, the separation of ownership and management in corporations creates information asymmetry and conflicts of interest between managers and shareholders External auditors play a crucial role in addressing these issues by providing independent assessments of financial disclosures, with audit quality serving as a key external monitoring mechanism that significantly influences firm performance While previous research has examined the impact of audit quality on firm performance, inconsistent results arise due to varying measurement approaches and different market contexts; some studies find a positive effect, others report negative or insignificant impacts.
Audit quality is a crucial factor that significantly impacts firm performance, yet it remains underexplored by researchers and policy makers in Vietnam The limited attention to audit quality can lead to investors overlooking its importance, potentially affecting the reliability of financial disclosures Consequently, insufficient emphasis on high-quality audits may hinder the availability of useful information necessary for informed investor decision-making Enhancing awareness and understanding of the role of audit quality can improve financial transparency and support overall corporate performance in Vietnam.
Vietnam's integration and development efforts have opened opportunities to participate in global organizations like WTO and TPP, but ensuring transparency and reliability of financial disclosures remains a significant challenge to attract foreign investment and maintain fair competition The collapse of Arthur Andersen in 2002 and recent scandals involving audit quality have highlighted the need to strengthen investor confidence and elevate the auditing standards of external firms In Vietnam, concerns over financial integrity have grown following scandals such as the evaporated inventories at Truong Thanh Corp, bad debts at Ocean Group, and accounting irregularities at NTACO, which led to a decline in stock market confidence and investor trust.
Audit quality remains a contentious issue between legislators and auditors, serving as a crucial factor in financial reporting According to the UK Financial Reporting Council’s 2008 audit quality framework, key determinants include audit firm culture, auditor skills and competence, the effectiveness of the audit process, the reliability and usefulness of audit reports, and external influences DeAngelo (1981) and PCAOB (2011) define audit quality as the likelihood of detecting material errors or omissions that could significantly impact financial statements, highlighting its importance in ensuring financial statement accuracy and integrity.
According to the International Federation of Accountants (IFAC), audit quality is the most essential characteristic of international auditing standards, requiring consistent interpretation, clear translation, enforceability, and a focus on achieving high-quality audits In Vietnamese Standards on Auditing 220 (VSA 220), audit quality is defined as the degree to which users are satisfied with the audit results, emphasizing the objectivity and reliability of the auditor's opinion and the entity’s responses to recommendations aimed at enhancing business efficiency within a reasonable timeframe and cost.
There is no consensus among researchers on the best method to measure audit quality, with studies relying on indirect indicators such as audit rotation, audit fees, firm size, litigation, auditor tenure, non-audit services, industry experience, and peer reviews (Sayyar et al., 2015; Hussein & Hanefah, 2013) According to Sori et al (2006), audit firm size is a reliable proxy for audit quality, as larger firms with better reputation, experienced practitioners, advanced technology, and substantial financial resources tend to provide more trustworthy audits of companies’ financial statements.
Moreover, the large audit firm size might not be pressured by revenue from big clients that affect its independence and objectivity when expressing audit opinion
The Institute of Internal Auditors was established in the United States in early 1942, marking the beginning of formal internal auditing practices In Vietnam, independent auditing firms emerged later, in 1991, to support financial transparency and accountability To ensure high-quality audits, firms and auditors must adhere to standards set by the Ministry of Finance and the Vietnam Association of Certified Public Accountants (VACPA) Additionally, auditors are required to follow Ethical Standards based on principles such as integrity, independence, prudence, and professional competence, which are essential for maintaining trust and credibility in the auditing process.
3 independence of mind and independence of appearance (ISA 200, 2009) and audit rotation is considered a representative variable for audit independence
In an attempt to enforce and improve audit quality in Vietnam, on 6 th December
In 2012, Vietnam’s Ministry of Finance announced the introduction of 37 new auditing standards, which became effective from January 1, 2014 Among these, VSA 220 specifically focuses on the "Quality Control of Financial Statement Audit Activities," aiming to strengthen audit procedures and ensure higher standards of independence and quality This standard sets out additional requirements to improve audit control activities and enhance the overall quality of independent audits in Vietnam.
R ESEARCH OBJECTIVES AND RESEARCH QUESTIONS
This study aims to analyze the impact of audit quality on the performance of listed companies in Vietnam, focusing on three key proxies: audit rotation, audit reputation, and audit firm experience It evaluates how these factors influence firm profitability, market value, and bankruptcy risk Additionally, the research examines the effect of VSA 220, a significant legal framework introduced to enhance audit quality in Vietnam, on overall firm performance.
In order to achieve those objectives, we conduct an empirical analysis on the firm level data in Vietnam to seek convincing answers for the following two research questions:
This study investigates the impact of audit quality, proxied by audit rotation, audit reputation, and audit firm experience, on the financial performance and stability of listed Vietnamese companies The findings reveal that higher audit quality significantly influences firm profitability (ROA), market value (Tobin’s Q), and bankruptcy risk (Z-Score) Specifically, positive effects are observed, indicating that reputable, experienced audit firms and appropriate audit rotation practices bolster firm performance, enhance market valuation, and reduce bankruptcy risk These results underscore the importance of audit quality as a critical factor in improving listed companies' financial health and investor confidence in Vietnam.
- Does the promulgation of VSA 220 in 2014 have any effect on firm profitability, market value and risk of bankruptcy of listed companies in Vietnam?
R ESEARCH METHODOLOGY AND DATA
This study analyzes panel data from 268 listed companies on the Ho Chi Minh Stock Exchange between 2010 and 2015 Financial institutions and insurance companies are excluded due to their distinct financial structures and performance measurement methods.
The Generalized Method of Moments (GMM) estimation is a powerful statistical technique used to analyze the impact of various factors in empirical research This method is widely applied in econometrics to obtain consistent and efficient parameter estimates, especially when dealing with endogenous variables By leveraging moment conditions derived from theoretical models, GMM enables researchers to accurately assess relationships within complex datasets Its flexibility makes it a preferred choice for analyzing economic and financial data, providing robust results even in the presence of heteroskedasticity or other violations of classical assumptions Overall, GMM serves as a valuable tool for producing reliable insights in academic and applied research settings.
This study investigates the impact of audit quality on firm performance by examining three proxy measures, both individually and collectively It conducts a thorough analysis of the correlation between audit quality and firm performance, while also assessing heteroskedasticity to ensure model robustness Additionally, the research evaluates the effectiveness of instrumental variables using Hansen and Sargan tests to confirm their validity Overall, the findings provide valuable insights into how different aspects of audit quality influence firm performance, contributing to the understanding of audit practices' role in corporate success.
R ESEARCH C ONTRIBUTION
This study addresses the limited empirical evidence regarding the impact of audit quality on the performance of listed companies in Vietnam, highlighting the inconsistency of previous cross-country research findings It distinguishes itself by analyzing multiple measures of firm performance, including accounting-based metrics like ROA, market value indicators such as Tobin’s Q, and bankruptcy risk assessed through the Z-Score Additionally, the research examines the effect of Vietnam’s legal audit framework, particularly the implementation of VSA 220, on audit quality as an important empirical contribution The findings offer valuable policy implications for investors' decision-making processes and guide policymakers in enhancing transparency within Vietnam’s business environment.
T HESIS STRUCTURE
The thesis is organized into several key sections for clarity and coherence The second section provides a comprehensive review of the theoretical framework and empirical evidence regarding the impact of audit quality on firm performance, highlighting its significance in financial reporting and corporate governance The third section details the research methodology and data collection process, ensuring transparency and reproducibility of the study Empirical results are presented in the fourth section, offering insights into the relationship between audit quality and firm performance based on analyzed data The final section concludes the thesis by summarizing key findings and discussing policy implications to enhance audit practices and improve firm performance outcomes.
FRAMEWORK AND EMPIRICAL EVIDENCE OF
T HEORETICAL LITERATURE OF AUDIT QUALITY AND FIRM PERFORMANCE
Audit quality is a complex and somewhat ambiguous concept, defined by DeAngelo (1981) and PCAOB (2011) as the likelihood of identifying material misstatements or errors in audited financial statements through appropriate audit procedures Eilifsen and Wilekens (2008) emphasize that audit quality results from the independence and competence of auditors in detecting material misstatements and providing accurate audit opinions based on sufficient evidence According to the International Federation of Accountants (IFAC), audit quality is a core characteristic of international auditing standards, requiring clear, consistent interpretation and enforceability to ensure high standards In Vietnam, VSA 220 describes audit quality as the level of user satisfaction with the audit's objectivity, reliability, and the usefulness of the auditor's recommendations in improving business efficiency within a reasonable timeframe and cost.
The role of third-party auditors in providing independent opinions on financial information disclosure is crucial for ensuring transparency and accuracy High audit quality serves as an essential external monitoring mechanism that enhances the reliability of financial reports Effective external audits promote stakeholder confidence, improve corporate governance, and support compliance with regulatory standards Ensuring audit integrity and professionalism is vital for maintaining trust in financial markets and fostering sustainable business practices.
6 which has a significant effect on firm performance This was explained from many relevant theories such as agency theory, stakeholder theory and theory of information asymmetric
Agency theory, developed by Jensen and Meckling in 1976, explores the relationship between shareholders and managers as agents responsible for maximizing investor returns It addresses the challenges in agency relationships, such as conflicting interests, differing strategic approaches, and varying risk preferences, aiming to align the incentives of managers with those of shareholders for effective corporate governance.
The problem relating to the separation between the ownership and management in large corporations is initially discussed by Adam Smith (1776), Berle and Means (1932)
Jensen and Meckling (1976) highlight the moral hazard issue, where managers may prioritize personal benefits over shareholders' interests by concealing inefficient operations They also point out that managers might manipulate accounting practices to misrepresent the company's financial health for self-interest Additionally, the conflict of interest between directors and shareholders is illustrated in Soltani (2007)’s research diagram, emphasizing the potential divergence of goals within corporate governance.
Source: Jensen (1983), Zahra and Pearce (1989)
Profitability Market Value Corporate Bankruptcy
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To minimize the impact of agency problems, Jensen (1983) recommends implementing independent monitoring systems that have no vested interests in either owners or managers Kim and Nofsinger (2014) emphasize the importance of establishing effective oversight mechanisms to monitor managerial behavior and reduce agency conflicts Auditors serve as impartial third parties, providing independent and objective verification of financial information disclosure, thereby enhancing transparency and accountability (ICAEW).
The audit function, whether internal or external, aims to address agency problems within organizations Internal auditors primarily support the board of directors by monitoring management behaviors and decisions to ensure compliance with company policies As a result, the main focus of internal auditors is safeguarding organizational integrity rather than prioritizing outside shareholders.
External auditors play a crucial role in providing important information and monitoring the activities of company directors, benefiting both internal stakeholders and external parties Their influence extends beyond that of internal auditors, as they serve a broader scope of users who rely on their financial reports for transparency and accountability According to Colbert and Jahera (1988), the reach and impact of external auditors' financial information are more extensive, ensuring greater stakeholder confidence and better corporate governance.
Dang and Fang (2011) provide an empirical test the relationship between the audit quality and owner-manager agency costs using the dataset of listed companies in China
Audit quality plays a crucial role in providing independent supervision and verifying accounting information to reduce agency costs Higher audit quality effectively lowers owner-manager agency costs, particularly in emerging markets According to Krishnan (2003), high external audit quality diminishes managers' ability to manipulate financial reports Habbash and Murya (2010) found that external audit, measured by auditor independence and audit quality, significantly constrains earnings management and helps moderate agency costs in the UK.
Stakeholder theory explains how an organization's relationships with both external and internal groups influence and are influenced by the achievement of its strategic objectives (Freeman, 1984) Key stakeholders include employees, customers, suppliers, government agencies, shareholders, and the local community Effective stakeholder management is crucial for organizational success and sustainability.
Effective financial decision-making impacts multiple stakeholders, emphasizing the importance of maintaining strong and transparent relationships with them Companies that foster good stakeholder relationships tend to achieve sustainable long-term growth and build a positive public reputation Conversely, poor financial performance can erode stakeholder trust, damaging the company's credibility and future prospects.
Figure 2.2 The stakeholder model of the corporation
Agency theory primarily focuses on shareholders' interests, while stakeholder theory adopts a broader perspective encompassing economics, society, and environmental considerations In recent years, organizations have recognized the importance of managing their public image, information disclosure, and creditworthiness Managers must effectively balance the interests and welfare of various stakeholder groups to foster trust and sustainability Addressing potential conflicts of interest and ensuring transparency in corporate information are essential for maintaining credibility Additionally, stakeholder theory emphasizes business ethics and social responsibility as core components of corporate governance.
According to Paydarmansh et al (2014), audited financial statements are crucial for addressing the ownership-management disparity highlighted in stakeholder theory Independent audit firms possess the expertise in accounting and finance necessary to identify material risks and errors in financial reports As a result, this enhances the reliability of financial information for stakeholders, fostering greater trust and transparency.
In Stakeholder Theory, the relationship between objectives creates a dual effect: when stakeholders focus on the accuracy and integrity of audited financial statements, it discourages managers from manipulating the company's financial data This alignment of stakeholder interests promotes transparency and enhances financial credibility, ultimately benefiting all parties involved (James and Izien, 2014).
Chiu and Wang (2014) investigate the social disclosure quality in Taiwan by applying the stakeholder theory They remind the disclosure information quality in stock market
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Asymmetric information is a key factor contributing to market failure, alongside externalities and public goods First introduced by Akerlof in 1970, this concept describes situations where one party in a transaction possesses more or better information than the other, leading to market inefficiencies Akerlof explained that buyers often gather market information and use statistical methods to estimate the average value of goods, while sellers have detailed knowledge about the specific attributes of their products This imbalance of information can result in adverse market outcomes and distortions.
Figure 2.3: The asymmetric information theory
Effective communication between sellers and buyers is essential for facilitating successful and efficient transactions When there is asymmetric information, it can lead to increased agency costs and adverse outcomes, ultimately hindering transaction success (Anderson and Lyall, 2013).
E MPIRICAL EVIDENCE ABOUT THE IMPACT OF AUDIT QUALITY ON FIRM PERFORMANCE
Investors, creditors, and suppliers are highly interested in a listed company's financial status, which underscores the importance of accurate and reliable financial reporting External auditors serve as independent third parties who verify and strengthen the credibility of a firm's financial statements Consequently, improving audit quality remains a key focus for regulators and researchers committed to enhancing transparency and building stakeholder trust.
Audit quality can be assessed through both direct and indirect approaches The direct approach involves measuring audit quality based on its core definition, focusing on the effectiveness and accuracy of the audit process In contrast, the indirect approach utilizes surrogate variables—such as audit firm reputation, expertise, or audit outcomes—to represent audit quality and select the most relevant indicators Both methods are essential for a comprehensive evaluation of audit performance and ensuring high standards in financial reporting.
Previous studies indicate that assessing audit quality through indirect methods is feasible, as audit quality is an often ambiguous and unobservable concept Balsam et al (2003) highlight that auditor characteristics serve as effective proxies for measuring audit quality Hussein and MohdHanefah (2013) advocate for the use of indirect approaches to evaluate audit quality, emphasizing their practicality Nguyen and Ha (2014) provide empirical evidence from Vietnam, demonstrating that audit rotation significantly influences auditor independence and overall audit quality Additionally, Sayyar et al (2015) suggest that audit fees and audit rotation are reliable indicators for measuring audit quality Furthermore, Al-Khaddash, Nawas, and Ramadan (2013) utilize a set of variables to assess audit quality, supporting the validity of the indirect approach.
Effective internal controls, audit firm size, audit fees, auditor independence, industrial specialization, and auditor competences are key factors influencing audit quality Ziaee (2014) highlights the importance of audit tenure, reputation, and firm experience in determining audit effectiveness James and Izien (2014) identify audit tenure, firm size, and auditor independence as primary proxies for assessing audit quality Similarly, Dadashi et al (2014) evaluate audit quality using proxies such as audit reputation, auditor independence, and industry specialization to provide a comprehensive understanding of audit performance.
Lu and Ma (2016) measure audit quality by audit opinion, audit reputation and audit fee
This study uses audit rotation, audit reputation and audit firm experience to proxy for audit quality because of the highly representative and the availability of data sources
Audit rotation presents for independent characteristic of audit quality, audit reputation and audit firm experience presents for the brand and specialty in auditing field
2.2.1 The impact of audit rotation on firm performance
Mandatory audit firm rotation, outlined in Section 207 of the Sarbanes-Oxley (SOX) Act, establishes a time limit on the tenure of auditors to ensure independence and objectivity This policy prevents current audit firms from being re-appointed after the expiration of their audit period for a specified duration The debate surrounding audit rotation centers on its impact on audit quality, with arguments questioning whether it ultimately improves or hampers the effectiveness of the audit process.
The primary purpose of an audit is to provide an independent opinion to shareholders regarding the true and fair view of financial statements in all material aspects, ensuring they are prepared in compliance with the Companies Act and relevant accounting standards This guarantees the benefits for users of financial statements, including shareholders, potential investors, employers, and other stakeholders within the business community (ICAEW, 2006) Efforts by policymakers, regulators, and academics focus on improving audit quality through measures that enhance auditor independence For example, Coyle & Deirdre (2010) found that audit firm rotation is one of the most effective strategies to strengthen perceptions of auditor independence, based on their research involving Irish accounting firms and regulatory bodies.
Research by Ouyang and Wan (2013), Anis (2014), Arel et al (2005), and Chi et al (2009) provides empirical evidence that audit tenure significantly influences stakeholders' perceptions of auditor independence and audit quality These studies highlight the importance of audit duration in maintaining auditor objectivity and ensuring the credibility of financial reports, which are crucial for investor confidence and regulatory compliance.
Ouyang and Wan (2013) find that extended audit periods beyond ten years can increase the likelihood of accounting fraud within companies Their research, based on a sample of U.S listed firms from 1996 to 2005, indicates that long audit tenure poses greater risks for large companies compared to smaller firms Empirical results confirm that audit rotation significantly influences audit quality and overall firm performance.
Okolie (2014) investigates how audit quality influences earnings management through discretionary accruals and economic operation manipulation among listed companies on the Nigerian Stock Exchange between 2006 and 2011 The study finds that higher audit quality, indicated by audit rotation and audit fees, has a significant negative effect on earnings management Specifically, audit rotation positively impacts firm performance by reducing managerial earnings manipulations, thereby promoting greater financial transparency and integrity.
Rahmina and Agoes (2014) highlight that business failure is often linked to audit failure, emphasizing the crucial role of audit quality in ensuring the credibility of financial statements They recommend establishing an Institute of Public Accountants to enhance audit standards and advocate for adopting international regulations governing auditor and audit firm rotation Specifically, they support implementing mandatory audit rotation every seven years for listed companies on the Indonesian stock market to improve audit effectiveness and financial transparency.
Ardiana (2014) investigates the role of external audit via audit rotation in enhancing the firm performance in Indonesia Firm performance is measured by P/E, P/B and Tobin’s
Q By using 2,240 firm-year observations during the period from 2007 to 2013, the study concludes that the longer audit tenure decreases the firm performance
Khatab (2013) investigates the impact of audit rotation on firm value, measured by Tobin’s Q, in the Egyptian stock market between 2005 and 2009 The study employs both Fixed Effects and Random Effects models, providing evidence that audit rotation positively influences firm performance The findings suggest that implementing audit rotation can enhance overall firm value and corporate governance in emerging markets.
Mostafa and Hussien (2010) conducted a self-questionnaire survey involving 50 randomly selected auditors, highlighting the importance of implementing mandatory audit rotation at the firm level in Egypt They argue that firm-level rotation is more effective than auditor-level rotation in enhancing audit quality and independence Their findings suggest that adopting firm-level audit rotation could improve regulatory standards and strengthen corporate governance in Egypt.
14 specialization industry, the audit firm will appoint auditors with extensive experience in this field to audit the client, which will generate more benefits for both sides
Sayyar et al (2015) explore how audit quality, represented by audit rotation, affects the performance of listed Malaysian companies between 2003 and 2012, finding no significant correlation with measures like ROA and Tobin’s Q Conversely, Myers et al (2003) suggest that extending audit periods can help reduce extreme management decisions, thereby positively influencing firm performance.
The role of audit rotation is viewed differently in the literature, with two primary perspectives Some researchers argue that prolonged audit tenure fosters closer auditor-client relationships, which may compromise auditor independence and the quality of financial statements Conversely, studies such as Anderson and Verma (2012), Crabtree et al (2004), and Lu & Sivaramakrishnan (2009) highlight that audit rotation is a practical and effective strategy to enhance auditor independence and objectivity.
(2015) examine the audit firm rotation and audit quality data in Florida government audit market and suggest that rotation policies have positive relation to audit quality via audit firm selection
Maintaining strong client relationships can lead auditors to become less skeptical and potentially overlook critical accounting information Conversely, research on audit rotation indicates that changing auditors after a certain period can enhance audit quality by providing a fresh perspective This balance between client pressure and periodic audit partner rotation is essential for ensuring objectivity and improving the overall effectiveness of the audit process.
It also increases the probability of detection of misstatements (Siregar el at, 2012)
T HE CONCEPTUAL FRAMEWORK
In general framework for audit quality and firm performance has been applied in this study
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METHODOLOGY AND DATA
D ATA COLLECTION
This study analyzes data from 268 listed companies on the Ho Chi Minh Stock Exchange (HOSE), Vietnam's largest stock exchange, covering the period from 2010 to 2015 Data was collected from audited financial statements and Board of Director reports available on Cophieu68, Vietstock, Stockbiz, and CafeF websites, excluding companies with missing variables to ensure data completeness To maintain financial comparability, financial institutions, insurance companies, banks, and investment funds were excluded due to their distinct capital structures and regulatory requirements The company's financial year-end is standardized to December 31st for consistent financial reporting across samples.
M ETHODOLOGY
This study employs a dynamic panel data approach based on the methodologies suggested by Okolie (2014) and Sayyar et al (2015) to examine the impact of audit quality on firm performance To address potential endogeneity issues—where audit quality may be influenced by subsequent firm performance through audit firm selection—the analysis incorporates one-year lagged dependent variables Firms with strong prior financial performance tend to maintain their current audit firms or hire reputable ones to bolster financial statement credibility, while those with poor past performance often seek higher-quality audit firms in the following year to enhance financial reporting and market valuation Consequently, the study utilizes the Generalized Method of Moments (GMM) estimation technique, which is more efficient and preferable over IV estimation in the presence of heteroskedasticity, ensuring robust and reliable results.
Following the work of Sayyar et al.,(2015) and Okolie (2014), the empirical models are written as:
ROA i,t = β 0 +β 1 ROA i,t-1 + β 2 AuditQi,t + β 3 LEV i,t + β 4 LNASSET i,t + β 5 SG i,t + ε i,t (1)
Tobin’Qi,t = α 0 + α 1 TQ t-1 +α 2 AuditQ i,t + α 3 LEV i,t + α 4 LNASSET i,t + α 5 SG i,t + ε i,t (2)
Z-Score i,t = γ0+γ1 Z-Score i,t-1+ γ2 AuditQ i,t +γ 3 LEV i,t γ 4 LNASSET i,t +γ 5 SG i,t + ε i,t (3) Whereas i: firm, t: time, from 2010 to 2015
In order to assess the impact of audit quality on firm performance comprehensively, this study measures firm performance from three approaches: market value, accounting profit and risk of bankruptcy
Dependent Variables: Firm performance is measured by
ROA measures firm earnings as a proportion of net income to totalassets ROA illustrates how much profit the firms can generate from their assets
The concept of this ratio was first introduced by Brainard and Tobin in 1968, providing a foundational framework for assessing asset valuation In 1969, Tobin refined this approach by recalculating Tobin’s Q as the ratio of the combined market value of a firm's stocks and liabilities to the asset replacement costs This ratio serves as a crucial indicator of market valuation relative to the actual cost of replacing assets, aiding investors and analysts in making informed financial decisions.
Measuring the market value of liabilities is often challenging, and estimating the replacement costs of assets can be complex due to the variety of asset types within a company As a result, many studies rely on book value rather than market value to assess liabilities and assets This approach is also employed in this thesis to calculate Tobin’s Q, providing a practical proxy for company valuation amid valuation difficulties.
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Tobin’s Q is a key indicator that measures a company's value by comparing its market capitalization to its total assets and liabilities When Tobin’s Q is below 1, it indicates that the company is undervalued, meaning the market perceives its worth as lower than the actual value of its assets Conversely, a Tobin’s Q above 1 signifies that the firm is overvalued, with the market assigning a higher value than the firm's asset-based worth This metric provides valuable insights into a firm’s valuation and investment potential.
High Tobin’s Q indicates that a company can easily mobilize capital in the stock market, leading to increased investment Conversely, when Tobin’s Q is low, companies tend to reduce their investment activity.
3 Z-Score (firm’s risk of bankruptcy)
Z-score is developed by Altman (1968) to calculate the risk of corporate bankruptcy This ratio is also used to evaluate the firm’s financial health status Z-Score is made up from five financial ratios:
- X3: Earning before interest and taxes / Total assets
- X4: Market value equity / Book value of total debt
A higher Z-Score indicates a lower risk of bankruptcy, making it a valuable metric for assessing financial stability The bankruptcy rating is classified into three benchmarks, providing a clear framework for evaluating a company's likelihood of insolvency Utilizing Z-Score analysis helps investors and stakeholders make informed decisions by accurately gauging the financial health of a business.
2.99< Z-Score Safety level The company will not likely go bankruptcy with the presented accounting figures
1.81< Z-Score < 2.99 Dangerous level The investors need to consider about the ability of bankruptcy
Z-Score