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Ohlson Logit Model

Autor:   •  March 20, 2014  •  Essay  •  461 Words (2 Pages)  •  1,691 Views

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The Ohlson Logit Model was established in 1980; and gauges nine different accounting –based variables to determine the possibility of the company's default. Ohlson stated that higher the o-score the higher the risks of financial failure, with 0.38 being the cut of point.

Tesco's scores have fluctuated over the past five years, with the highest O-score of 1.919 occurring in 2009 and the lowest score of 1.045 in 2008. Tesco's have been above the cut-off point of 0.38 over the past five years and according to Ohlson's theory they should have been bankrupted within the first one or two years of default; the fact that Tesco's are still continuing to generating profits proves that the O-score model is not accurate.

Marks & Spencer's O-score has been similar to Tesco's in the sense that it has been fluctuating from 2008 to 2012. Their highest score occurred in 2008 with 1.975 and the lowest of 0.864 in 2010. Again like Tesco's M&S' have been in financial default over past five years and still performing well. However this should bring concern to both companies due to the fact why they have been in this state, as there this does not cut the risks of bankruptcy.

The Beneish Earnings Manipulation model is a mathematical model which uses financial ratios, with eight different variables to determine whether a company has the ability to manipulate its earnings. The variables are assembled from the data in the company's financial statement, which are combined together to create an M-score to illustrate the extent to which the earnings have been manipulated. If an M-score is less than -2.2 this means that the company will not be a manipulator, whereas a company with an M-score higher than -2.2 suggests that the company is more likely to be a manipulator.

These are signs of bankruptcy, and are seen as that the company has something to hide and don't want others to acknowledge it. The


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