Tests of the generalizability of Altman's bankruptcy prediction model

Though developed in 1968 using a small sample of firms from the 1950s and 1960s, Altman's Z-score model remains a commonly used tool for evaluating the financial health of companies. Because of the age of the model and other attributes, such as its small sample of manufacturing firms and the use of equal group sizes of bankrupt and non-bankrupt firms, it is likely that model is not as effective in classifying firms in more recent studies as it was when it was developed by Altman. This study examines three research questions using recent sample data: (1) Is Altman's original model as useful for predicting bankruptcy in recent periods as it was for the periods in which it was developed and tested by Altman? (2) Is the model as useful for predicting bankruptcy of non-manufacturing firms as it is for predicting bankruptcy of manufacturing firms? (3) Is the model as useful for predicting financial stress conditions other than bankruptcy as it is for predicting bankruptcy? Our results are consistent with negative answers to questions one and two and a positive answer to question three.

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