An Assessment of the Altman Z Score on Predicting Corporate Failure. A Case of Insolvent Financial Companies Listed on the Zimbabwe Stock Exchange
Abstract
The study explored the causes of corporate failure among financial institutions using the Altman Z-scores. Traditionally, most finance professionals and firms depend on ratio analysis to determine performance, but the application of models like the Altman Z-Scores has hardly been utilized to analyze firm performance and predict potential failure. The major objective of this study was to assess the level to which Altman Z-scores can be used in determining corporate failures a year or two years before insolvency. The research used a mixed methods approach in gathering data. Financial data from annual reports and statements were quantitatively analyzed to compute key financial ratios essential for deriving the Altman Z-Score. Qualitative methods were also employed to explore best financial practices that can mitigate corporate failure risks in Zimbabwean financial institutions. A total of 20 industry experts, including financial analysts, regulators, and financial institution executives, were purposively selected based on their qualifications and experience, for interviews to gather qualitative data. The findings of the study highlight the Altman Z-Score model’s effectiveness in predicting financial distress well in advance while also highlighting governance, risk management, regulatory compliance, and operational efficiency as critical areas for mitigating corporate failure. The effectiveness of the Altman Z-Score model and its reliability in identifying at-risk companies both two years and one year before failure was confirmed and the findings give pointers to consider in developing policies that promote financial stability and resilience in the corporate sector.
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