EBJI2010HayesHodgeHughes - A Study of the Efficacy of...

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Economics & Business Journal: Inquiries & Perspectives 122 Volume 3 Number 1 October 2010 A Study of the Efficacy of Altman’s Z To Predict Bankruptcy of Specialty Retail Firms Doing Business in Contemporary Times Suzanne K. Hayes University of Nebraska at Kearney Kay A. Hodge University of Nebraska at Kearney Larry W. Hughes Central Washington University Authors are listed in alphabetical order. Abstract: Altman’s Z, a multiple discriminant analysis bankruptcy model using commonly accepted cutoff criteria, may provide a useful decision rule to predict financial distress in firms operating in a wide variety of industries. In this study, we outline the construction and interpretation of the Z- Score and apply it to several pairs of firms ( N =17) from a variety of specialty retail industries spanning two consecutive years. Past research indicates that Altman’s Z predicted future financial distress in 90 percent of the firms studied. In this study, all but two of the bankruptcies (94 percent) would have been accurately predicted. Despite some criticism of the model’s efficacy, two firms were misclassified yet later revealed potential financial distress. Keywords: Altman’s Z, financial distress, bankruptcy, performance, strategy Introduction Before the financial disaster of 2007 and the current economic crisis, the period from 1999 to 2002 hosted an “unprecedented number of [U.S.] corporate bankruptcies” (Moyer, 2005, p. 1). Over 400 firms with assets in excess of $100 million and as much as$400 billion in debt and claims filed for bankruptcy during that time. As total bankruptcies have increased steadily over the past thirty years, business filings have shown a slight downward trend (Figures 1 and 2). Although public firms
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Efficacy of Altman’s Z to Predict Bankruptcy Hayes, Hodge & Hughes Economics & Business Journal: Inquiries & Perspectives 123 Volume 3 Number 1 October 2010 filing for bankruptcy are typically less than one percent of all business filings, the volume of assets and debts involved are considerable. For example, in 2001, 257 companies with $256 billion in assets filed for bankruptcy; a year later, 191 public firms with total assets exceeding $375 billion filed. Thirty-four of the 2002 bankruptcy filings were by firms with assets in excess of $1 billion each (Administrative, 2009). Figure 2 . Bankruptcy Filings, Business-only Source: Administrative Office of U.S. Courts. (2009). Bankruptcy statistics. Information retrieved July, 2009, from http://www.uscourts.gov/bnkrpctystats/bankruptcystats.htm y = 5.6626x 6 - 361.35x 5 + 8905.9x 4 - 104987x 3 + 582276x 2 - 1E+06x + 2E+06 R² = 0.5939 Total Business Non-Business Trendline
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Efficacy of Altman’s Z to Predict Bankruptcy Hayes, Hodge & Hughes Economics & Business Journal: Inquiries & Perspectives 124 Volume 3 Number 1 October 2010 Given the relatively high frequency of bankruptcies filed by publicly-traded businesses, and the threat posed to suppliers and other stakeholders that rely
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This note was uploaded on 04/06/2012 for the course ECON 202 taught by Professor Sanjeev during the Spring '12 term at Indian Institute Of Management, Ahmedabad.

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EBJI2010HayesHodgeHughes - A Study of the Efficacy of...

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