Thinking about bottom-feeding among stocks depressed by bankruptcy filings? Be careful. History shows that firms that cook the books are unlikely to survive bankruptcy.
A study from the University at Buffalo (N.Y.) School of Management found that, of 162 companies that declared Chapter 11 bankruptcy between 1981 and 1994, companies with aggressive accounting practices are 21 percent less likely to survive bankruptcy. Indeed, fewer companies have survived bankruptcy over the past 20 years–a trend expected to continue, given the prevalence of aggressive accounting practices in corporate America.
Other findings:
Companies that switched auditors prior to filing for bankruptcy survived bankruptcy 24 percent less frequently than did firms that did not switch.
Companies that postponed filing for bankruptcy protection survived bankruptcy 18 percent less frequently than firms that filed for bankruptcy protection before they committed debt violations.
Switching auditors is usually a sign that the auditor dumped the client because the company is too risky and is heading toward bankruptcy, or that the client dumped the auditor because it wanted the auditor to report more aggressively. Either way, it’s a bad sign for the future of the company.
