in Beneish model, shouldn’t the intercept be adjusted when analyzing unlevered entities.
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The equation for Beneish Model is as follows :
M-score = –4.84 + 0.920 (DSR) + 0.528 (GMI) + 0.404 (AQI) + 0.892 (SGI) + 0.115 (DEPI) – 0.172 (SGAI) + 4.679 (Accruals) – 0.327 (LEVI).
In case of an unlevered firm, the last component, i.e. LEVI would be 0.
Of course sir, i know that last term would be zero in case of an unlevered firm which leads to a greater m – score than it would have been for a exactly similar levered firm. This will imply that unlevered firm’s earnings quality is inferior to that of the levered counterpart which in essence makes no sense ( it’s like the model is punishing for not taking up debt ) as both the entities are exactly the same, on the contrary intuitively the unlevered firm has got better earnings quality and in no case avoiding debt financing will lead to deterioration of earnings quality.
Thus, i proposed adjustment to the intercept of the model’s equation while evaluating unlevered firms to avoid getting spurious results.