Usage of altman's model in the prediction of corporate failure : the case of companies listed on the Nairobi stock exchange
Kyole, Esther Mueni
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Signs of potential financial distress are evident long before bankruptcy occurs (Grice and Dugan, 2001). Financial distress begins when a corporation is unable to meet its scheduled payments or when the projection of future cash flows points to an inability to do so in the near future. In the popular imagination, many corporate failures are thought of as misfortunes dealt out by a capricious and impersonal market (El Shamy, 1989). But business analysts have built an entire genre of business writing, what might be called the post mortem case study, around a belief that most business failures could either be predicted or prevented. Amidst a climate of unprecedented financial leverage and rising interest rates, the finance sector is scrutinizing the performance of corporate borrowers more closely than ever before. As nervous lenders pour over financial statements looking for any sign of financial distress, the search continues for an accurate means of identifying failure before it occurs. This study used a descriptive survey to predict corporate failures for firms listed on the NSE. The secondary data was collected from the NSE library and specifically the financial statements for the period between 1991 and 2006. The study used Altman's Z-score model to predict corporate failures. A questionnaire was also designed and sent out to the stock brokerage firms. This was in order to seek their use of Altman's model for financial advice. The data was then coded in the SPSS and analysed using percentages. Presentation was done in tables, charts and graphs. The study found out that the model was able to predict the financial distress of all the firms that failed. When the model was applied on a few selected firms currently listed on the NSE, only one firm was found to be healthy. The study also found out that the model is not being used by the brokerage firms to determine the financial distress of companies so as to advice the investors accordingly. Instead, the investment advisors use the financial ratio analysis to determine the financial health of firms. The study recommends that an investigation be done to determine whether financial advisors actually offer sound financial advice to investors given their claim that the ratio analysis they use is reliable.