Knowledge that Transforms

Financial ratios, Prediction achievement criterion, Bankruptcy, Decision making

Income smoothing, Extraordinary items, Income before extraordinary items

Financial reporting, Australia, Timeliness, Disclosure

Auditing, Substantive test, Sampling, Sampling plan

C-V-P Analysis, Cost-Value-Profit analysis, Uncertainty, Capital market equilibrium

Segment reporting, Disaggregation, Informational content, Insurance industry

Portfolio selection, Information economics, CAPM

Auditing, Audit quality, Uniform application of standards, Accounting standards

Altman, 1968; Beaver, 1966; Daniel, 1969; Deakin, 1972; and Horrigan, 1966 have researched the usefulness of financial ratio information.' These authors defined usefulness as predictive ability.2 Predictive ability was measured by determining the statistical predictive relationship between financial ratios and some specified real world phenomenon, e.g., bankruptcy (Altman), business failure (Beaver, Daniel and Deakin) and long-term credit standing (Horrigan). In contrast, this study works with experienced bank personnel using financial ratios to make subjective predictions of bankruptcy.3 This research views bank credit evaluation as a probabilistic information processing problem. Bayes' theorem is used as a model of human information processing for this problem. The set of uncertain events consists of bankruptcy and nonbankruptcy. The items of information are financial ratios.4