IntroductionAccording to Pate (2002), 257 public companies, with total assets of $256 billion, filed for bankruptcy in 2001. That this is the highest number of bankruptcy filings since 1980 is alarming. Furthermore, it is uncomfortably large compared to the number of filings during the last recession (125 filings in 1991 and 91 filings in 1992). Pate further estimates the likely number of public company bankruptcy filings in 2002 will be about 200, 22 percent below the 2001 level, but still well above the 1986-2000 average of 113. Another clearly visible trend is the increase in the number of large companies going bankrupt. Altman (2000) points out that bankruptcy in firms with large asset size, while quite rare prior to 1966, became more common in 1970s. According to Altman, since the enactment of the current U.S. Bankruptcy Code in 1978, there were at least 100 Chapter 11 bankruptcies of firms whose asset size exceeded $1 billion.
In this environment, business leaders and finance professionals would be well advised to refresh their knowledge of bankruptcy prediction models. Fortunately, those models have been around for a while. The present paper is intended to serve as an introduction into one of the most popular bankruptcy prediction models, the Z-score model developed by Edward Altman in his pioneering 1968 paper.
The importance of bankruptcyBankruptcy is not localized to a specified economy or industry and it is affecting firms all over the world and brings a significant impact on the economy of a country. Zopounidis & Dimitras (1998:2) discussed failure as a worldwide problem, and the number of failing firms is important for the economy of a country and can be considered as an index of the development and robustness of the economy.
The very long process of bankruptcy is economically disastrous for both stakeholders and...