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Financing Small Corporations in Five Manufacturing Industries, 1926-36

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Portents of Discontinuance 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: Publication Date: 1942 Chapter Title: Portents of Discontinuance Chapter Author: Charles L. Merwin Chapter URL: Chapter pages in book: (p. 90 - 106) 0 PORTENTS OF DISCONTINUANCE Credit analysis theory is bsa.d on the assumption that sinc, the success of a business enterprise is measured in pecuniary terms it is posaible to distinguish betwsr the sound and the unsound, the successful and the unsuc- cessful, by examining certain "credit" ratios. / That is to sly, the theory auumss that if a designated cred- it ratio falls below or rises above same espisically de- teredned level - depending on the relationship measured by the ratio - that deviation signals financial difficul- ty and even, if it persists, portend. discontinuance of business operations. The data &v*ilable for use in this stu4 permit an experimental tasting of this primary as- sumption, particularly the assumption that persistent deviation from an empirical norm foretells disappearance of an enterprise from the business scene. Such a testing is subjeot to limitation., but it can ascertain whether in this particular group of corporstions a systematic ra- tio pattern wee exhibited by the discontinuing companies. For a test of the type to which this chapter is de- voted our data should pertain only to the experience of campaniss that are iomi to have suffered severe finan- cial difficultisi resulting in reorganieaticn or failure. The sample with which we have to work is not, however, of this character. Strictly speaking, all we laiow is that these compsnie' ceased filing federal corporate income tax returns, Some say have changed

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