Credit has become very important in the global economy (Cynamon and Fazzari, 2008).
The Altman (1968) failure prediction model, or derivatives thereof, are often used in the
identification and selection of financially distressed companies as it is recognized as one
of the most reliable in predicting company failure (Eidleman, 1995). Failure of a firm can
cause substantial losses to creditors and shareholders, therefore it is important, to detect
company failure as early as possible. This research report empirically tests the Altman
(1968) failure prediction model on 227 South African JSE listed companies using data
from the 2008 financial year to calculate the Z-score within the model, and measuring
success or failure of firms in the 2009 and 2010 years. The results indicate that the
Altman (1968) model is a viable tool in predicting company failure for firms with positive
Z-scores, and where Z-scores do not fall into the range of uncertainty as specified. The
results also suggest that the model is not reliable when the Z–scores are negative or
when they are in the range of uncertainty (between 2.99 and 1.81). If one is able to
predict firm failure in advance, it should be possible for management to take steps to
avert such an occurrence (Deakin, 1972; Keasey and Watson, 1991; Platt and Platt,
2002).
| Identifer | oai:union.ndltd.org:netd.ac.za/oai:union.ndltd.org:wits/oai:wiredspace.wits.ac.za:10539/12535 |
| Date | 18 March 2013 |
| Creators | Rama, Kavir D. |
| Source Sets | South African National ETD Portal |
| Language | English |
| Detected Language | English |
| Type | Thesis |
| Format | application/pdf |
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