Abstract
The Z-Score model developed by Altman in 1968 is considered one of the more reliable predictors of bankruptcy. In contraposition to the existing literature, the paper aims to investigate the Z’-Score and Z’’-Score ability to predict unlike-to-pay (UTP) loans, which is an event far earlier than insolvency. To investigate this relation, the study uses a unique sample of UTP loans, provided by a major Italian bank, and applies, as a predictive model, the Logit model, well known in academics. Final results confirm that the Z’-Score and the Z’’-Score are able to forecast UTP loans. Furthermore, the findings of the papers reveal the importance of corporate governance variables in predicting financial failures.
Highlights
This research investigates the accuracy of Altman’s model in the Italian context and, its ability to predict early signals of crisis and not just insolvency
Some studies link the bankruptcy to a financial event (Lummer & McConnell, 1989; Hotchkiss, 1995; Peterson & Rajan, 1995; Tashijian, Lease, & McConnell, 1996; Beaver & Engel, 1996, Andrade & Kaplan, 1998; Boot, 2000), while, according to other approaches, a company can be defined in crisis only when the market value of its assets falls below a certain threshold
Alert analysis is of particular interest for all stakeholders of a company (Warner, 1977; Charalambous, Charitou, & Kaourou, 2000; Charitou, Neophytou, & Charalambous, 2004; Davis & Karim, 2008), as shown by the introduction of the procedures of alert in the new Italian Code of Bankruptcy (“Codice della Crisi e dell’Insolvenza”)
Summary
This research investigates the accuracy of Altman’s model (with particular focus on the Z’-Score and Z’’-Score models) in the Italian context and, its ability to predict early signals of crisis and not just insolvency. Since the 60’s with the development of analyses of a discriminating type, namely, Beaver’s model (1966) and Altman’s model (1968) and the diffusion of more sophisticated databases (Altman & Saunders, 1997), several empirical studies have attempted to analyze the relation between economic-financial indicators and bankruptcy. Despite this fact, researchers still debate about the definition of crisis and the criteria to be used to determine if a company is in financial distress. Alert analysis is of particular interest for all stakeholders of a company (Warner, 1977; Charalambous, Charitou, & Kaourou, 2000; Charitou, Neophytou, & Charalambous, 2004; Davis & Karim, 2008), as shown by the introduction of the procedures of alert in the new Italian Code of Bankruptcy (“Codice della Crisi e dell’Insolvenza”)
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