Predicting Listed Companies’ Failure in Jordan Using Altman Models: A Case Study

Bahaaeddin Ahmed Alareeni,Joel Branson

doi:10.5539/ijbm.v8n1p113

Abstract

The Altman Z-score (1968) model and the Altman Z’’-Score model (1993) have been created and applied in the US and other developed countries in a specific era. It is therefore possible that their results are not generalisable to less developed countries in today’s context. We tested the generalisability of these two statistical failure prediction models in the Jordanian environment. We used a sample of 71 failed and 71 non-failed companies that were chosen based on the same industry, year of data, and a comparable size of total assets. We tested if the two models predict failures as they did in the US and European countries and if these models are thus relevant for Jordanian firms. We found that the original Altman Z-Score (1968) model still works effectively. The model is generalisable in the Jordanian context for assessing failed industrial companies. For service companies, however, we found that the Altman models could not provide strong indicators to differentiate between failed and non-failed companies.

Highlights

The collapse of stock markets has thrown a lot of companies out of business and destroyed many economic sectors throughout the world
We tested the generalisability of these two statistical failure prediction models in the Jordanian environment
Studies have demonstrated that the AMODELS and their variants have a very high degree of accuracy in predicting corporate financial failure in the US as well as in some emerging markets

Summary

Introduction

The collapse of stock markets has thrown a lot of companies out of business and destroyed many economic sectors throughout the world. Auditors are obligated by auditing standards to assess and report about companies’ capability to continue as a going-concern. Companies fail after receiving clean or unqualified audit opinions. Statistical failure prediction models (SFPMs) can predict business failure with a high accuracy rate within a few years before the failure. Amongst the most common SFPMs are the Altman Z-Score 1968and Altman Z’’-Score 1993 (AMODELS). Studies have demonstrated that the AMODELS and their variants have a very high degree of accuracy in predicting corporate financial failure in the US as well as in some emerging markets. Altman used a multiple discriminant analysis (MDA) to classify companies into high or low default risk categories

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