Tests of the generalizability of Altman's bankruptcy prediction model

Though developed in 1968 using a small sample of firms from the 1950s and 1960s, Altman's Z-score model remains a commonly used tool for evaluating the financial health of companies. Because of the age of the model and other attributes, such as its small sample of manufacturing firms and the us...

Full description

Saved in:
Bibliographic Details
Published in:Journal of business research 2001-10, Vol.54 (1), p.53-61
Main Authors: Grice, John Stephen, Ingram, Robert W
Format: Article
Language:English
Subjects:
Bankruptcy
Effectiveness
Generalizability
Predictions
Studies
Z-score model
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:Though developed in 1968 using a small sample of firms from the 1950s and 1960s, Altman's Z-score model remains a commonly used tool for evaluating the financial health of companies. Because of the age of the model and other attributes, such as its small sample of manufacturing firms and the use of equal group sizes of bankrupt and non-bankrupt firms, it is likely that model is not as effective in classifying firms in more recent studies as it was when it was developed by Altman. This study examines three research questions using recent sample data: (1) Is Altman's original model as useful for predicting bankruptcy in recent periods as it was for the periods in which it was developed and tested by Altman? (2) Is the model as useful for predicting bankruptcy of non-manufacturing firms as it is for predicting bankruptcy of manufacturing firms? (3) Is the model as useful for predicting financial stress conditions other than bankruptcy as it is for predicting bankruptcy? Our results are consistent with negative answers to questions one and two and a positive answer to question three.
ISSN:0148-2963
1873-7978
DOI:10.1016/S0148-2963(00)00126-0