Using Altman Z-score models for predicting financial distress for companies : the case of Egypt panel data analysis

Abstract EN

This study seeks to identify the impact of applying Altman Z-Score models on the quality of financial distress predictability in the Egyptian registered non-financial institutions.

The deductive research approach is used.

A sample of 44 institutions is selected from the EGX 70 index during 2016-2020, that is corresponding to 220 firm year observations.

The study is a panel data analysis.

The selected study sample is characterized by continuation of operations, complete data, and currency recorded in Egyptian pound.

The test tools used to forecast financial distress were the original Altman Z-Score model (1968) and the modified Altman Z-Score model (1993).

The dependent variable is the firm financial distress represented by the sum of Z-Score.

The independent variables are the ratios that are applied to the Altman Z-Score models.

The logistic regression analysis was applied to examine the influence of the ratios used in the models.

These ratios are net working capital/total assets NWC/TA, retained earnings/total assets RE/TA, earnings before interest and tax/total assets EBIT/TA, book value of equity/total liabilities BVE/TL, sales/total assets S/TA.

The SPSS program was used.

Findings indicate that applying Altman Z-Score models have a significant impact on the quality of financial distress predictability.

Findings also indicate that the modified Altman Z-score (1993) model presents better results than the Altman Z-Score (1968) model for the prediction of the future financial distress of firms and the probable causes that might influence investor decisions and firm financial performance.

The results of this study are expected to be beneficiary to external stakeholders like investors and regulatory bodies as well as to internal stakeholders like employees and managers.