Can Z-Score Model Predict Listed Companies’ Failures in Italy? An Empirical Test

Abstract

The Altman Z-score model for predicting bankruptcy of businesses was constructed and fine-tuned in the USA in 1968 and updated in 1999. It is therefore possible that its results cannot be extended to non-Anglo-Saxon countries in today's context. This paper ascertains if the Z-score can correctly predict the failure of industrial listed companies in Italy. First, we have analyzed the theoretical and practical characteristics of the original Z-score model and we highlight some of its potential shortcomings. Second, we have examined a sample of 102 industrial companies, quoted on the Italian Stock Exchange in the period 1995-2013 -51 companies had had their shares permanently suspended or delisted because of a default, whereas the remaining 51 companies, which have been selected based on same core business and year of data collection, did not go bankruptcy or had their shares permanently suspended. We investigated whether the Z-score model could have predicted the default of the firms in the sample for up to three years earlier, with a degree of accuracy and reliability comparable to the one obtained by Altman (and by many other authors) in the tests performed nowadays in the U.S. and Anglo-Saxon contexts. We found that the Z-score works effectively and performs well in predicting failures of Italian firms, although with a slightly lower degree of reliability when applied to Anglo-Saxon companies. Therefore, we conclude that the Z-score can be applied to the Italian context, provided that some critical points illustrated in this study are taken into account.

Assessing the Probability of Failure by Using Altman’s Model and Exploring its Relationship with Company Size: An Evidence from Indian

“…It was concluded that original Z-score model performs well in an international context and its classification accuracy can be enhanced by introducing additional variables. Celli (2015) verified the distress prediction power of original Z-score model and it was found that Z-score model has high predictive power as shown by overall successful rate 87.3%, 77.5% and 66.6% before one, two and three years of default. It was concluded that Z-score model can predict distress with high level of accuracy and low error rate.…”

“…After the development of the Altman's model many authors or researchers developed their own models by using different variables and methodology. Many studies like Agarwal and Taffler (2005), Sarbapriya (2011), Rayalaseema and Muhammad (2012), Anjum (2012), Karamzadeh (2013), Altman et al (2014), Celli (2015) etc. tested the predictive accuracy of the Altman's model by applying it to the recent time period and it was found that Altman's model is still a powerful tool to predict the bankruptcy.…”

Análisis De La Probabilidad De Quiebra De Las Empresas Cotizadas Españolas.

“…En el ámbito latinoamericano, se ha empleado el modelo original ajustado a las características específicas de países como Costa Rica (Vargas, 2013) o Colombia (Berrío y Cabeza, 2015). En Europa se ha aplicado el modelo a las empresas italianas (Altman et al, 2015;Celli, 2015) y a las griegas (Gerantonis et al, 2009), mientras que en Asia ha sido empleado a las compañías chinas (Thomas et al, 2011) entre otras.…”

An Analysis of Assessment of Financial Distress in Textile Sector of Pakistan (2012-2018)

“…According to the results, Zmijewski followed by Springate and Altman model gives high accuracy in bankruptcy prediction rate that leads to delisting. Celli (2015) examined a data of 102 Italian companies listed at Italian stock exchange for a period of 1995-2013 using Altman Z-score. From these 102 companies there were 51 companies were delisted and 51 were listed.…”