Charles L. Merwin

English

Research Papers in Economics

This PDF is a selection from an out-of-print volume from the
National Bureau of Economic Research
Volume Title: Financing Small Corporations in Five Manufacturing
Industries, 1926-36
Volume Author/Editor: Charles L. Merwin
Volume Publisher: NBER
Volume ISBN: 0-870-14130-9
Volume URL: http://www.nber.org/books/merw42-1
Publication Date: 1942
Chapter Title: Appendix D, Data on the Samples of Discontinuing
Companies, and Techniques of Analysis
Chapter Author: Charles L. Merwin
Chapter URL: http://www.nber.org/chapters/c9392
Chapter pages in book: (p. 134 - 139)0
DATA ON THE SAMPLESOF
DISCONTINUING COMPANIES,AND
TECHNIQUES OF ANALyp
It was .zplaim.d in Chapter 4that the
continuanc. analysis of financialratio. makes it . ssry to c,ut an'estimated normal"it thet4 disappearingcompanies are to beeffectively withthose for surviving companies.This procea,is n.ed.d because .ach year beforediscontinj.represt3 a different assortment of calendaryears, each with own cyclical Implication.Tabi. D-1shows, for thefive industries, theniath.Xof timeseach of thecalendar years 1926-35 was represented ineach of uie sixyear....
periods.
The method of calculatingthe estimatednormal. / maybe illustrated byshowing how itwas used for the baking canies' ratioof currentassets to currentli- abilities.For the 81 survivingbaking corporati as a whole this ratio wa,a. follows during the1926.35 periods /
1926 1.15 1931 1.77 1927 1.21 1932 1.22 1921 1.15 19)3 1.19 192 1.23 19% 1.2& 1930 1.35 1935 1.15
Prow Table D-1 itmaybe observed that forthe sam- ple of 47diacontimgr.g bakeriesthe calendaryears rep- resented wsr asfollows:1926, 15 tiess; 1927, 6timas; 19, 7 times;1929, 9 tinsa;1930, 10 times.Theother Calendar year.did notappear at all in the sixthyear before disctim for thepresent sample.
If thesurvivingcorporations 'current, ratios for these 'aricusca1eij'ars are weighted by the nuaber of timeseach caldayear appears in the givenyear be- fore disco wit is possibleto ascertainwhatApendiz I)
Table D-1 - sIS 01 uIscoIrIIwIml cW?0R*?Ioas DI
PItIIWiSTISz Nar of has. gach Calendar Thor
i. kpissietsd$A belt YSOI bsfor. Diacoettassoc. /
1926 1,9193 19 1935
'35
Ss..d on 11191 bonOr5PI15 (rreviOUshlcitid) Table. 6-A to (i-E inAp-
psodlo?.
(? csiii..)
SLoth 15 6 7 9 10 - - -
?Uth - 15 6 7 9 10 - -
?c.rtb - 15 6 7 9 10 - -
ThiN - 15 6 7 9 10 -
3.coiel - 15 7 9 10
rtrat - - - 15 6 7 9 10
S9', C1ot.tng
(41 cosntsa)
Sloth 14 6 10 2 9 - -
FUth 14 6 10 2 ' - -
14 6 10 2 9 - -
ThIrd --- -
14
-
6
11.
10
6
2
10
9
2 I
?irst
frn1tiirs
- - 6 10 2 9
($ ceaies)
Sloth 11 81) . 5- - - -
Plfth 11 8 10 4 5 - -
-- 11 8 10 - -
Third - -ii 8 10
8
4
10
5
L.
-
5
-
- 5.cond
Pirat
-- -
-
-
-
Uii 8 10 1. 5
(3 esop'"sa)
Sloth
Fifth
12
-
10
12
6
W
a.
6
11
4
-
U-
-
- Fourth
Third
-
-
- 12 10
1.
6
10
12
4
6
10
11
S.
6
-
U
4 11
First - - 12 10 6 4
Iic.,iso ?oo
(ji
Sloth
Fifth
Fourth
Third
-
6 7
6
4
b
6
S.
-
8
6
7
II
-
8
6
7
6
-
-
8
6
7
-
8
6 8
Second - i 6 7 6 8
FlirtFiienciu,gSu,agCoropGt,O
theiragp.git. currentratio would have be
year-betore-discontinuanci chronolog.
current ratiofor the bakeri.s in tb. sixtht0,,
disCOIltifluaflo.i3 thUSCalCulatedfTCIathe following
dit,:
Myision of 58.C%) by 47 give. 1.2, theestja&tedp_ l currentratio for the sixth year b.fodjcmt_
ance. That jto .ay, if the current ratioof the 47
disappearing caniei, taken together, hadbeen thesa
as that of the 81. survivIng canpanies, itwoujjhave be
1.2 in the sixth year before discontinuance.
The esttait.d norls for the otherYear-b.fore...djs..
contjnuaizo. periods, and for the otherratios, arecal.. culated in the swy.It is cbvicus thatanestisat. ednor.al is applicable only tothe particularratio,
1e and tiperiod under consideratjoFor racj
reaacs this theoretical ratio has beenCalculated only
for financial relationship.whichappear to be earlj and
definite tdicstor, ofapproaching discontinuance.These are the three ratios analyzedin Chapter 4, andtheir es- United norial,are presented in Table D-2 foreach of the five industries andeach of the sixyears before dis-
continuance.
£ t..t of statistical
signifjca_nce was applied to the yearefo
data analyzed in Chapter4, Thi. procedure,Fri.'. test ofranks,/ sake, it possible to appraisethe significanceof the observed
W14s1)ing of thegap between the estinit.dnorwels and the ratio, for thedi.conti,g cCspa_niee as tine of discon- tinuance drewnear.
Tible D-3 showsthe ranking ofthe differences he- tween the twogroups of ratios.For each ratio and each industry thesediff.ress have beengiven a value, the llest differe, being valued at 6andthe largest
1926 -13 t*ais 1.18
1927 - 6 t1
1925 - 7 Umse
1.28
1.13 761
Los 192 -9 tlae. 1.23 310? 1930 - 10 tJa 1350
TOfti. 47 58.00Audiz D
at 1, and the valueshave beenranked by year before discontinuance,tronfl to large.Thepurpe of the teat isto determine theprcb.biliL7that this arrange- t would occurby thence.
The firstStep Li theproceduretests whether the ranks in allfive industriesfollew the samepattern. isdone by cparj,the actualdistribution of ranks with thedistrjbjon to beexpected if the ranks
Toals 5.4 - OP CCISTIPIIJING C?v8*21CN$CoaI%ss,oimij,o
3*WL6S OP DISCOSITI*flpa CC'C5*T!OIj3III FIVE IeUSTsI
Latinatod Norinle for Thrus Ssl.ct.4Notios i31* Tsar, Ssfor. Diacontiniaiwsa
Not$p aid Tsar
sfor. biaconttnuac.
rr.it Asa )/ to ismiLi.aiiiuJ
FIlth
Posuth
ThIrd
Sscond
First
N.'
8th
Fifth
?ourtp
Third
Secoid
FIrst
Iii.rktq CspItslf
toota1 A.a.ts
Siath
FIfth
PQsjrth
Third
5reor4
First
il Sssid on Ysbi.. 5-1 to 3-5 a.4 S.22 to 3-26 inSat. Nook(sac footnote
2 of App.n1z A1 IbovO) aid ?.bl. D-1 bovs. The esIi.mst.d nors..1 ratio is
bc saigit.d averag, of Lb. continuing cOsr.1ss' ratiosforthvarious
calondar ysars ccnt..insd in inch y.ar before discont.tntsanc..
Wc1isiv. of gov.n bonds.
i/ current lisbiliti.. pbs. long-tsr.debt.
9Current5355%.sinusCuITintlIabilitIes.
4z-
& !-bochin. £z A
1.2 2.3 2.9 2.4
1.3 2.4 3.1 2.3 2.1
1.2 2.4 3.6 2.1 2.0
1.2 2.4 3.6 2.0 1.6
1.3 2.6 3.6 1..9 1.7
1.2 2.4 3.4 1.7 1.6
2.3 1.7 2.i 3.5 2.7
2.4 1.7 2.9 3.3 2.7
2.3 1.9 3.2 3.2 2.6
2.4 1.8 3.5 3.0 2.4.
2.3 2.0 3.7 2.8 2.2
2.2 1.9 3.5 2.5 2.0
.0)0 .47 .4.2 .26 .24
.056 .1.7 .42 .24 .22
.04? .1.7 .42 .22 .20
.069 .6? .43 .20 .16
.051. .6d .41 .16 .16
.04.0 .66 .39 .16 .16138
T4I. - 3A1LI3 OF DI3COltIllJINW COTINuI,
CCSA SIS IN ?IY1 IIUU3TRIsApplicaLjsof ?ri.' Test ofi*o totirss 3slsctsd Wa-
ties for 31* Ysor. lsfore D1scontjnsjan/
!itto aai Industry
'a cieUiinj
7viit*rs
Stons-d.y
Woehia. tool
TOTAL
Fjnanc01 StsaLjCQror01
Sixth Fifth PowthThirdSteondFIr.,.
Probehilfty that. this rsnkingsould occur bychance: than Ito 100
Nit Worth o TotaDebt
Stone-clay
diinsj
1.5
TOTAL
Prob.bilftythat this rsnktnneuld occur by thence:loss than 1 In100
Prsblibjlfty that, thisronkin1 -ouldoccur by ciance:Los. than 1 In l)Q
/ Wo.nd on - in østaBook (c. footoote2 ot Appendii A, abous) aM TableD- abou. Thiflst, differeso,is '°Presented by6, Ui. next largest differ. once b75, Mso fsrtji.
6 5
6 4
6
5 6
5 1
29 6 19
6 5
6 5
6 5
1 2
4.5 ó 3
23.525 1?
6
6
6
5
4.5
j_
3 2
is
1
5
4
4'
4. l.
4
1.5
5 5 2 5 2
4
2
242).518 16.5
3 1.5
3 2
3 2
4.51.5
17.5 13
1 2
2 1
3 1
1 2 1
4 2 1
16 10 5ie,idiz D 139
were drawn at randoa. Under the condition of rsndodraw-
nga the total. of all coluena would be expected to be
qual; the teat therefore consists In seasuring the prob-
biltty of these totals' deviating from equality. The
g.coed part of the teat Cc.par.s the order of the average
rejiks, or col totals, with the order 6, 5, 4, 3, 2, 1;
jn other words, it dster1nes the degree to whichthe
sixth year before discontinuance shows the 1...t differ-
eC.between the e.tlted noreala Ind thediscontinuing
caniea' ratio, the fifth year before discontinuance
the next l lest difference, and so forth. The list step
coiflh5the.. two procecbarsato show th. probability
uist, for the five industries cined, the observedin-
creaseinthe divergence would occur by chance as time of
di.ccntinuanceapproached.It wasfound that for all
three ratios this probability was less than one chance in
$ hundred.
The basic dataonth. identical sanpie of discontin-
uing cospaniss, for the last six year. befodiscontin-
uance, are presented in the Data Book (seefootnote 2 of
Appendix A, above), Tables 8-22 to 8-26, which also show
the 1926-35 high-low range for thecorresponding data on
the identical ..le of surviwingcanies.

Financing Small Corporations in Five Manufacturing Industries, 1926-36

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