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An empirical evaluation of the Altman (1968) failure prediction model on South African JSE listed companies
(2013-03-18) Rama, Kavir D.
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).