Financial Ratios in Women-Owned and Men-Owned Small Firms: Evidence from Finland

The aim of this study is to show how the key ratios of financial statement analysis differ in companies owned by women and men. In the study, nine hypotheses are derived based on previous studies. The central starting point for the hypotheses concerning the differences in key ratios is the first hypothesis that women-owned companies are more labor-intensive than men-owned companies due to women’s personal factors. It follows from this hypothesis that the cost structures and the balance sheet structures of companies owned by women and men are different, which leads to differences in key figures. In addition to labor intensity, the derived hypotheses concern three ratios of profitability, two ratios of solvency and three ratios of liquidity. The hypotheses are tested with data consisting of 6951 women-owned and 30,916 men-owned small and medium-sized Finnish companies from the year 2020. In these companies, the owner is the global Ultimate owner (GUO) who is at the top of the company’s ownership structure. Financial ratios are compared to each other in a non-controlled situation and in a controlled situation where control variables are used. The results of the study mostly support the derived hypotheses.© 2023 by author(s) and Scientific Research Publishing Inc. This work is licensed under the Creative Commons Attribution International License (CC BY 4.0). http://creativecommons.org/licenses/by/4.0/fi=vertaisarvioitu|en=peerReviewed

Estimation of Long-Term Profitability of Startups: An Experimental Analysis

The objective is to assess the performance of different methods to derive an estimate of internal rate of return (IRR) for startups. Koyck transformation is first used to estimate the parameters of a distributed revenue lag model which are then used to derive IRR. For estimation different scenarios of artificial time series of expenditure and revenue are constructed to describe the early years of startups. These scenarios are based on different parameter values of the distributed lag function and are classified into nine experiments. The performance of the following six different estimation methods are compared with each other in these nine experiments: unrestricted OLS, OLS through the origin (RTO), restricted OLS, Least Absolute Deviation (LAD), Ridge Regression (RR), and restricted Maximum Likelihood (ML). The experimental results indicate that the most efficient estimation method is the Ordinary Least Squares (OLS) method where the regression is forced through the origin (RTO). The least efficient method is the unrestricted OLS, which emphasizes the importance of RTO.© 2022 by author(s) and Scientific Research Publishing Inc. This work is licensed under the Creative Commons Attribution International License (CC BY 4.0). http://creativecommons.org/licenses/by/4.0/fi=vertaisarvioitu|en=peerReviewed

Timing of Revenues and Expenses : Evidence from Finland

In accounting, a critical issue is the timing of revenues and expenses in the annual closing of accounts. If expenditures are expired as expenses faster than revenues are generated, the expense method is accelerated. In the opposite case, the expense method is decelerated. Thus, the timing (time lags) of expenses and revenues is an important determinant of earnings and profitability. The objective of this study is to analyze critically alternative methods to estimate the time lags of revenues and expenses. Six different methods based on correlation, return on investment, logarithmic differences, unrestricted OLS, restricted OLS, and Solver optimization are analyzed. Empirically, these methods are applied to nine-year time series of financial statements from a sample of 697 Finnish firms. Empirical analyses show that these methods still have deficiencies that potentially lead to unreliable results of timing. In future, more research on this important topic is called for.© 2022 by author(s) and Scientific Research Publishing Inc. This work is licensed under the Creative Commons Attribution International License (CC BY 4.0). http://creativecommons.org/licenses/by/4.0/fi=vertaisarvioitu|en=peerReviewed

Economic bonding, auditor safeguard and audit quality : Peer review evidence from individual auditors

In this paper, we examine whether the economic bond between an individual engagement partner and client threatens auditor independence and thus audit quality. We also investigate if auditors good economic position acts as a safeguard against this economic bond. Using a sample of peer reviewed individual audit engagements of 264 Finnish auditors we examine whether the clients economic size is likely to affect audit quality as measured by the degree of compliance with audit standards (peer review). Furthermore, using taxable earned (salaries) and unearned (capital gains) income information of auditors we investigate if high income level of an auditor diminishes the risk of financial self-interest threat. Our results provide evidence that Finnish auditors show a very high independence although big clients economic size (turnover) weakly affects audit quality. There is weak evidence that auditors are likely to show higher quality for larger clients. Our results also suggest that this financial self-interest threat can be safeguarded by auditors high unearned income level diluting the economic bond with the client. Unearned income acts here as a proxy for economic wealth.fi=vertaisarvioitu|en=peerReviewed

Business Prohibition—How Company’s Financial Statements Reflect the Positions of Convicted Persons?

This study deals with the companies where persons who are convicted of a business prohibition for aggravated financial crimes, have acted in various positions. The main question is how the key figures in the financial statements of these contact companies reflect the activities of these convicted people. The study mainly concentrates on companies where the convicted person has acted as a CEO or deputy CEO. Five research hypotheses are derived and four of them are supported by evidence. The hypotheses were tested with empirical data, which mainly consisted of very small micro, limited, private companies with only 3 - 4 employees. There were originally 22 financial variables in the data, of which 10 were selected for continuation. Finally, stepwise logistic regression (LR) analysis was used to develop a model to detect companies with convicted persons. This model included variables measuring company growth, liquidity, and solidity, but not profitability. Moreover, a variable reflecting inconsistency in behavior of financial ratios was incorporated into the model. In years 1 - 5 before the sentence, the model correctly classified 63.4% of contact companies and 64.2% of non-contact companies. The classification accuracy of the model decreased systematically when the positions of the convicted persons decreased.© 2023 by author(s) and Scientific Research Publishing Inc. This work is licensed under the Creative Commons Attribution International License (CC BY 4.0). http://creativecommons.org/licenses/by/4.0/fi=vertaisarvioitu|en=peerReviewed

Why Does an Auditor Not Issue a Going Concern Opinion for a Failing Company? Impact of Financial Risk, Time to Bankruptcy, and Cognitive Style

This study investigates the effects of client’s financial risk, time to bankruptcy, and auditor’s cognitive style on issuing a Going Concern Opinion (GCO) for failing companies. Empirical tests are based on financial data from 328 bankrupt firms and peer review data from 172 auditors. Cognitive style on an intuitive-analytic dimension is approximated by the degree of auditor’s compliance with the ISA standards for analytic procedures in peer review. Empirical findings support research hypotheses and show that seriousness of the financial risk and time distance to bankruptcy are important determinants of GC judgment accuracy. They also show that the performance of the cognitive style of the auditor is related to the fit between the cognitive style and the characteristics of the GC situation. The results indicate that an auditor’s individual characteristics, i.e. cognitive style, affect his/her decision making when issuing GCO. This study is the first approach that systematically investigates the relationship between financial risk, distance to bankruptcy, and cognitive style on GC judgment in an archival research.Copyright © 2020 by author(s) and Scientific Research Publishing Inc. This work is licensed under the Creative Commons Attribution International License (CC BY 4.0). http://creativecommons.org/licenses/by/4.0/fi=vertaisarvioimaton|en=nonPeerReviewed

Financial Reporting : Long-Term Change of Financial Ratios

Financial ratios are constructed mathematically as a ratio of numerator and denominator taken from financial statements (income statement or balance sheet). They are useful indicators of financial performance of a firm. However, changes in a particular ratio are difficult to interpret, because they can be related to changes in the numerator, the denominator, or both. Therefore, each change needs an interpretation of its own. The objective of the study is to analyze what kinds of roles have changes in the numerator and the denominator played in the long-term change of a set of financial ratios. The set of ratios consists of seven ratios reflecting profitability and its determinants, liquidity, and long-term solvency. The changes of these ratios are analyzed using the trends of the ratio components for a ten-year period in a sample of 9160 active and 81 bankrupt Finnish firms.fi=vertaisarvioitu|en=peerReviewed

Profitability Ratios in the Early Stages of a Startup

This study develops a mathematical framework to analyze the time series of profitability ratios in the early stages of a startup. It is assumed that the expenditure of the startup grows at a steady rate and generates a proportionally identical flow of revenue in each period. The profitability in terms of the internal rate of return (IRR) and the lag structure of revenue flows are assumed constant over time in describing the adjustment process towards the steady state. The startup is assumed to expense in each period a constant part of periodic expenditure and beginning-of-the-period assets. The adjustment processes of three kinds of profitability ratios are investigated: return on investment ratio, profit margin (as percent of net sales), and (traditional) cash-flow margin (as percent of net sales). It is shown that IRR, growth, expense rate, and lag structure strongly affect the early time-series behavior of profitability ratios. Thus, in the early years, due to unstable adjustment processes, profitability ratios are unable to reflect profitability (IRR) properly and can give distorted signals of the performance of a startup. These findings are supported by numerical analyses with the parameters estimated for a sample of 2608 Finnish startups classified into five clusters

Discounted Cash Flow (DCF) as a Measure of Startup Financial Success

The purpose of the study is to investigate the characteristics of the discounted cash flow (DCF) as a measure of startup financial success. In general, DCF is found the most popular method in startup valuation followed by the internal rate of return (IRR) and the payback period methods. However, the consequences of using this method in startup valuation are rarely analyzed in financial research. In this study, a simplified mathematical model is developed to describe the time-series development of the cash flow. This model is based on the growth of expenditures and their ability to generate revenues from the founding of the startup. The model employs IRR as the measure of true profitability and the average lagin revenue generation as a proxy of the payback period. Numerical experiments are used to show the sensitivity of DCF to the parameters of the model. The results indicate that the use of DCF favors startups that grow slowly and have a short payback period but that also exhibit a high IRR. The longer the time series of the startup used in the analysis, the more significant role IRR tends to play in DCF. Empirical evidence extracted from a sample of Finnish startups supports the numerical findings.© 2019 by author(s) and Scientific Research Publishing Inc. This work is licensed under the Creative Commons Attribution International License (CC BY 4.0). http://creativecommons.org/licenses/by/4.0/fi=vertaisarvioitu|en=peerReviewed

Do firm failure processes differ across countries: evidence from Finland and Estonia

This study considers the novel topic of comparing firm failure processes between different countries. For seventy bankrupt Finnish firms corresponding pairs are found among Estonian bankrupt firms based on industry, size and time of bankruptcy. Despite the similarity of firms from two countries, the analysis shows remarkable differences in both pre-failure financial data and reasons for failure. Based only on financial data, five failure processes are detected for Finnish and six for Estonian firms. Established failure processes associate with different failure reasons. The study contributes to literature by showing that for similar companies failure processes can differ across countries. In practice, the established information about different failure processes can be applied when building or using bankruptcy prediction models