Validity Analysis of Financial Failure Prediction Models During the Covid-19 Pandemic

Abstract

Unexpected bankruptcies of companies cause significant damage to company partners, investors, employees, countries, commercial and financial creditors. In this context, the financial failure risks should be constantly measured and controlled. However, it is important to constantly check the validity of financial models that measure the risk of the financial failure of companies. Because the higher the validity rates of these models, the higher the probability of investors and researchers to make the right decision according to the results obtained from these models. In this context, validity tests widely used in the literature, namely Altman (1968), Springate (1978), Ohlson (1980), Fulmer (1984), Zmijewski (1984), Canada (1987) and Grove (2001) models, were applied in this study. The study sample comprises of 8 energy companies in the US markets, which were officially declared bankrupt between 2018 and 2020. The universe of the study includes all companies and excludes financial institutions, financial companies and insurance companies. The research results have shown that Springate and Altman models best predict the financial failure risk of companies. However, Canadian and Fulmer models are the second group of models with the highest performance. The overall accuracy rate of the Grover model is also slightly above the overall average, while the overall accuracy rate of the Zmijewski and Ohlson models is below the general average.