Distressed Firm and Bankruptcy Prediction in an International Context: A Review and Empirical Analysis of Altman's Z-Score Model

Abstract

The purpose of this paper is firstly to review the literature on the efficacy and importance of the Altman Z-Score bankruptcy prediction model globally and its applications in Finance and related areas. This review is based on an analysis of 34 scientific papers published from the year 2000 in leading financial and accounting journals. Secondly, we use a large international sample of firms to assess the classification performance of the model in bankruptcy and distressed firm prediction. In all, we analyze its performance in firms from 32 European and three non-European countries. This kind of comprehensive international analysis has not been presented thus far. Except for the U.S. and China, the firms in the sample are private and cover non-financial companies across all industrial sectors. Thus, the version of the Z-Score model developed by Altman (1983) for private manufacturing and non-manufacturing firms (Z''-Score Model) is used in our testing. The literature review shows that results for Z-Score Models have been somewhat uneven in that in some studies the model has performed very well, whereas in others it has been outperformed by competing models. None of the reviewed studies is based on a comprehensive international comparison, which makes the results difficult to generalize. The analysis in this study shows that while a general international model works reasonably well, for most countries, with prediction accuracy levels of about 75%, and exceptionally well for some (above 90%), the classification accuracy may be considerably improved with country-specific estimation. In some country models, the information provided by additional variables helps boost the classification accuracy to a higher level.

Performance Comparison of Multiple Discriminant Analysis and Logit Models in Bankruptcy Prediction

“…In the previous studies, there have been recorded instances that do not distinguish among the variety of definitions. Similar to Altman et al (2014) procedure, we consider terms liquidation, restructuring and failure as identical. Thus, the company is included in the failing group of sample if it satisfies one out of the conditions: (i) the company files a bankruptcy petition, (ii) the company ceases operation or is in liquidation, and finally (iii) the company is allowed to initiate the restructuring process.…”

Financial Risk Measurement and Prediction Modelling for Sustainable Development of Business Entities Using Regression Analysis

“…The wide usage of the Altman model as a measure of a financial distress of strength in the economic and financial research points out that it is widely accepted as a reasonable, simple and consistent measure of the distressed entity at risk [60]. Thus, this model was tested in the conditions of Slovak business environment.…”

Financial Bankruptcy across European Countries

“…However, to determine the reliability of default prediction and whether the underlying patterns are country specific, multi-country studies are required (Altman et al, 2016). Therefore, based on accounting data from 114,484 defaulting and 1,033,661 non-defaulting manufacturing firms from six Western European countries in 2015, we provide evidence on the country-specific default prediction.…”