The study of bankruptcy is becoming more relevant and important as even large companies
are failing that cause economic and social problems to the society. Using financial distress
models to predict failure in advance is for most businesses absolutely essential in their
decision making process. Hence, this study involves a critical investigation in the applicability
of the Altman (1968) and Springate (1978) z-score models in predicting financial distress in IT
and Services companies of South Africa.
The Altman and Springate models were however developed in a different economic
environment, time horizon, industry and country. Testing these models in the South African
context is important to determine the practical applicability and relevance of the models. The
main objective of the study is to test the Altman and Springate models in determining
practical predictive ability of failure in selected South African IT and services companies listed
on the Johannesburg Security Exchange and to comment on the models applicability
according to the empirical results. The study is designed into three sections. The first section
will discuss the theoretical aspects of the study. The second part will be the discussion of the
research results, and finally the conclusion and recommendations of the study will be
presented.
The first sample companies was 24 failed and 46 nonfailed information technology and
services companies listed on the Johannesburg Security Exchange from 1999 to 2003. The
failed companies were matched to two nonfailed companies in the same sector according to
their turnover size. Additional nonfailed real estate and information technology companies
were added to evaluate the prediction ability of the models in these sectors using substantial
samples, as the first sample results were inconsistent, especially on the nonfailed companies.
Therefore, the final sample of the study is composed of 86 (24 failed and 62 nonfailed)
services and information technology companies. The study employed an analysis of financial
statements and derived the z-score of the sampled companies to test the predictive ability of
the models in forecasting bankruptcy. The analysis utilized ratios, which are related to the
models in the study.
The results reported in the empirical study for total failed and nonfailed sample companies
show these models fail to predict failure and non-failure amongst South African service and
information technology sample companies. The study is also extended to predict failure and
non-failure to investigate if the models are more applicable to predict failure in some sub-sectors
of the sampled services and information technology companies. The results are not
consistent as the models predicted failure but not nonfailure, or vice versa. Therefore, the
models are not successful to predict any sub-sector correctly.
It is generally assumed bankruptcy prediction models are useful regardless of industry, time
horizon, and country. The findings reported in the study for each model indicated that the
overall accuracy of the Altman and Springate z-scores models accuracy rate were reduced when used on the South African service and information technology sample, which is
different from those companies used to develop the original models. Therefore, the study
concluded that the Altman and Springate bankruptcy prediction models are not justifiable to
be applied to predict bankruptcy in the South African service and information technology.
Hence, it is not advisable to use these models in predicting failure in the non-manufacturing
firms, especially in South African services and information technology companies.
Important recommendations were outlined based on the results of the study. Some of the
recommendations are the development of practically applicable bankruptcy prediction models
in the IT and services companies of South Africa to elevate inappropriate financial decisions,
incorporation of other important indicators of financial well-being during bankruptcy prediction
process, checking the practical applicability of prediction models after some period of time.
The future research work based on this study is also suggested as developing models to the
database in the study, developing new bankruptcy prediction model to the services and
information technology companies of South Africa, testing the Altman and/or Springate
models on the South African manufacturing and retailing companies, and testing bankruptcy
prediction models to the non-listed relatively smaller turnover sized firms where the incidence
of business failure is greater than larger corporations.
| Identifer | oai:union.ndltd.org:netd.ac.za/oai:union.ndltd.org:ufs/oai:etd.uovs.ac.za:etd-09292005-154852 |
| Date | 29 September 2005 |
| Creators | Kidane, Habtom Woldemichael |
| Contributors | Prof A van A Smit |
| Publisher | University of the Free State |
| Source Sets | South African National ETD Portal |
| Language | en-uk |
| Detected Language | English |
| Type | text |
| Format | application/pdf |
| Source | http://etd.uovs.ac.za//theses/available/etd-09292005-154852/restricted/ |
| Rights | unrestricted, I hereby certify that, if appropriate, I have obtained and attached hereto a written permission statement from the owner(s) of each third party copyrighted matter to be included in my thesis, dissertation, or project report, allowing distribution as specified below. I certify that the version I submitted is the same as that approved by my advisory committee. I hereby grant to University Free State or its agents the non-exclusive license to archive and make accessible, under the conditions specified below, my thesis, dissertation, or project report in whole or in part in all forms of media, now or hereafter known. I retain all other ownership rights to the copyright of the thesis, dissertation or project report. I also retain the right to use in future works (such as articles or books) all or part of this thesis, dissertation, or project report. |
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