Altman’s Z-Score Models of Predicting Corporate Distress: Evidence from the Emerging Sri Lankan Stock Market

Abstract

This study investigates the ability of three versions of Altman’s Z-Score model (Z, Z’, and Z”) of distress prediction developed in the U.S. to predict the corporate distress in the emerging market of Sri Lanka. The results show that these models have a remarkable degree of accuracy in predicting distress using financial ratios computed from financial statements in the year prior to distress. The overall success rate of 81% is observed using the Z”-Score. The out-of-sample evidence provided in this paper means that the Z-Score models seem to have a very good potential in evaluating the risk of corporate distress in smaller emerging markets as well.

Keywords: Altman Z, Distress prediction, Ratios, Emerging markets, Sri Lanka

JEL Classification: G15, G32, G33