Z-Score

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“Can Altman Z-score Models Predict Business
Failures in Greece?”
Nikolaos Gerantonis
Department of Management and Business Administration
University of Piraeus, 4 Ag. Marinas Str, Greece
Konstantinos Vergos
PhD, Director of Research Department, Cyclos Securities S.A
39 Panepistimiou Str,10564, Athens, Greece
Apostolos G. Christopoulos
Corresponding Author
University of Athens, Department of Economics
5 Stadiou Str, Athens 105 62, Greece
E-mail: axristop@econ.uoa.gr
Abstract
This paper analyses whether Altman Z-score models, can predict correctly company failures. The empirical analysis examines all listed in the Athens Exchange companies, during the period 2002-2008 and discontinuations of operation for these companies during the same period. It is investigated whether Z-score models can predict bankruptcies for a period up to three years earlier. Our study shows that Altman model performs well in predicting failures. This is in line with other findings. The empirical results are interesting since they can be used by company management for financing decisions, by regulatory authorities and by portfolio managers in stock selection.

Keywords: Valuation, Altman, Regulation, Share price, Capital markets, bankruptcy JEL Classification Codes: G33:G14

1. Introduction
1.1. Examined Issues
In the study it is examined whether z-score alone can predict business failure for the examined companies in the examined period. To examine this it is investigated whether z-scores one up to four years before bankruptcy can predict business failures or financial problems. The study is interesting for financial analysts and portfolio managers given that in the case that discriminant analysis is useful, they can use it for stock picking and asset allocation. Discriminant analysis can also be a valuable tool for investors. Companies with high probabilities to bankrupt should trade at a discount to their value. If this is correct, then this paper provides an interesting contribution to bankruptcy literature, by linking z-score with business failure prediction and asset allocation in Greece. 1.2. Previous Research

Multivariate prediction of bankruptcy as established by using univariate analysis of bankruptcy predictors was initially developed by Beaver (1967, 1968) who found that a number of indicators could © Research Journal of Internatıonal Studıes - Issue 12 (October., 2009)

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discriminate between matched samples of failed and non-failed firms for as long as five years prior to failure. Altman (1968) defines five predicted factors and sets the base for other researchers to examine the validity of multivariate models. Following to the Beaver and Altman research seems to verify the validity of Altman models, but their prediction ability is found gradually lower. Begley et.al (1996) examines the Altman z-model and concludes that the model performs better in US data during the 1980s than during the period 1990-1995. Similar are the findings of Grice and Ingram (2001), who also find better performance for manufacturing companies.

2. Data Issues and Methodology
2.1. Data
In order to test the credit risk of the construction companies in Greece, two Z–score models are examined, in particular the z-score models developed in Altman (1993). The financial data used are annual and cover the period of 1999-2006. To compute the market value used, we take the market value of the company on 31 December of each year. The prices were taken by EFFECT S.A. database and we use the Athens stock exchange daily report to identify when the company share price was suspended. From our sample we exclude companies that were listed for less than three years, and companies that merged.

On total, the examined sample consists of 373 companies, listed on the Athens Stock exchange in the examined period, 45 of them bankrupted or their shares were suspended permanently and 328 companies did not bankrupt or had their shares permanently suspended....
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