The Impact of Using Cash Flow Elements and Patterns to Predict Financial Distress

Abstract

The study aims at using the elements of cash flows and their patterns in order to anticipate financial distress applying the model of (Zmijewski, 1984) and Altman (1968) to a sample of industrial companies listed on the Amman Stock Exchange (ASE), in which twenty companies were classified as control, experimental and testing companies. To achieve the objectives of the study, this is to analyze the cash flows statement of companies’ sample study during the period of 2010-2017, and to test the methodology for studying the ability to predict the failure of companies using the model of Zmijewski and Altman. In order to test the hypotheses of the study, multiple regression model method is used in addition to the data validity test methods through statistical analysis program (E-views9). The study concluded that Zmijewski model and Altman model had a high ability to predict financial distress. The models agreed that there was an impact of the fourth, fifth, sixth and eighth patterns of cash flows in predicting Financial Distress, the absence of the impact in financing cash flows and the third pattern in predicting Financial Distress. The study recommends industrial companies to use cash flows patterns because of their informative content that are useful and accurate in identifying the financial position of the companies.