A Study of the Efficacy of Altman’s Z ToPredict Bankruptcy of Specialty RetailFirms Doing Business in ContemporaryTimesSuz...
Efficacy of Altman’s Z to Predict Bankruptcy                                                           Hayes, Hodge & Hugh...
Efficacy of Altman’s Z to Predict Bankruptcy                                    Hayes, Hodge & Hughes                     ...
Efficacy of Altman’s Z to Predict Bankruptcy                                      Hayes, Hodge & Hughesfinancial ratios as...
Efficacy of Altman’s Z to Predict Bankruptcy                                   Hayes, Hodge & HughesInterpreting Altman’s ...
Efficacy of Altman’s Z to Predict Bankruptcy                                      Hayes, Hodge & Hughesuseful in predictin...
Efficacy of Altman’s Z to Predict Bankruptcy                                    Hayes, Hodge & Hughespublic company with n...
Efficacy of Altman’s Z to Predict Bankruptcy                                                Hayes, Hodge & Hughesindicated...
Efficacy of Altman’s Z to Predict Bankruptcy                                     Hayes, Hodge & Hughes2008 Investigation  ...
Efficacy of Altman’s Z to Predict Bankruptcy                                               Hayes, Hodge & Hughesof 4.84, p...
Efficacy of Altman’s Z to Predict Bankruptcy                                           Hayes, Hodge & Hughes         Our g...
Efficacy of Altman’s Z to Predict Bankruptcy                                              Hayes, Hodge & HughesFerrier, W....
Efficacy of Altman’s Z to Predict Bankruptcy                                       Hayes, Hodge & Hughes                  ...
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A Study of the Efficacy of Altman’s Z To Predict Bankruptcy of Specialty Retail Firms Doing Business in Contemporary Times


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A Study of the Efficacy of Altman’s Z To Predict Bankruptcy of Specialty Retail Firms Doing Business in Contemporary Times

  1. 1. A Study of the Efficacy of Altman’s Z ToPredict Bankruptcy of Specialty RetailFirms Doing Business in ContemporaryTimesSuzanne K. HayesUniversity of Nebraska at KearneyKay A. HodgeUniversity of Nebraska at KearneyLarry W. HughesCentral Washington UniversityAuthors are listed in alphabetical order. Abstract: Altman’s Z, a multiple discriminant analysis bankruptcy model using commonly accepted cutoff criteria, may provide a useful decision rule to predict financial distress in firms operating in a wide variety of industries. In this study, we outline the construction and interpretation of the Z-Score and apply it to several pairs of firms (N=17) from a variety of specialty retail industries spanning two consecutive years. Past research indicates that Altman’s Z predicted future financial distress in 90 percent of the firms studied. In this study, all but two of the bankruptcies (94 percent) would have been accurately predicted. Despite some criticism of the model’s efficacy, two firms were misclassified yet later revealed potential financial distress. Keywords: Altman’s Z, financial distress, bankruptcy, performance, strategyIntroduction firms with assets in excess of $100 million and as much as$400 billion in debt and Before the financial disaster of 2007 claims filed for bankruptcy during that time.and the current economic crisis, the period As total bankruptcies have increasedfrom 1999 to 2002 hosted an steadily over the past thirty years, business“unprecedented number of [U.S.] corporate filings have shown a slight downward trendbankruptcies” (Moyer, 2005, p. 1). Over 400 (Figures 1 and 2). Although public firmsEconomics & Business Journal:Inquiries & Perspectives 122 Volume 3 Number 1 October 2010
  2. 2. Efficacy of Altman’s Z to Predict Bankruptcy Hayes, Hodge & Hughesfiling for bankruptcy are typically less than firms with total assets exceeding $375one percent of all business filings, the billion filed. Thirty-four of the 2002volume of assets and debts involved are bankruptcy filings were by firms with assetsconsiderable. For example, in 2001, 257 in excess of $1 billion each (Administrative,companies with $256 billion in assets filed 2009).for bankruptcy; a year later, 191 public Total Business Non-Business y = 5.6626x6 - 361.35x5 + 8905.9x4 - 104987x3 + 582276x2 - 1E+06x + 2E+06 Trendline R² = 0.5939 Figure 2. Bankruptcy Filings, Business-only Source: Administrative Office of U.S. Courts. (2009). Bankruptcy statistics. Information retrieved July,2009, from http://www.uscourts.gov/bnkrpctystats/bankruptcystats.htmEconomics & Business Journal:Inquiries & Perspectives 123 Volume 3 Number 1 October 2010
  3. 3. Efficacy of Altman’s Z to Predict Bankruptcy Hayes, Hodge & Hughes gained acceptance by auditors, Given the relatively high frequency management accountants, and databaseof bankruptcies filed by publicly-traded systems beginning in the mid-1980s.businesses, and the threat posed to Although, Altman originally developed thesuppliers and other stakeholders that rely Z-Score based on a small sample ofon firms’ solvency for their own success, a manufacturing firms, some research seemsreliable bankruptcy model with consistent to show that it is useful in other areas, suchpredictive power is essential in today’s as healthcare, with some modifications (Al-business environment. Sulaiti & Almwajeh, 2007). Bankruptcies seem to unfold rapidly Altman’s Z-Score formula is aand news about them seems unexpected, multivariate formula used to measure thealthough the signs may have been in financial health of a company and toevidence for years before the filing takes diagnose the probability that a companyplace. Naturally, many organizational will go bankrupt within a two-year period.stakeholders are interested in finding a Studies of Altman’s Z have yielded mixedreliable method to predict bankruptcy and results, and recent literature questionsfinancial distress. To date, the methods whether or not the formula, tested in thedesigned to predict bankruptcy events have mid-twentieth century on manufacturinghad mixed reviews. One common firms, is useful in today’s marketplace.bankruptcy prediction method is Altman’s The Z-Score uses various accountingZ-Score formula. The objective of this study ratios and market-derived price data tois to apply Altman’s Z-Score in a predict financial distress and futurecontemporary analysis during a period of bankruptcy. The original formula wasrapidly-changing business conditions. The developed on a sample of 66 manufacturingauthors study the predictive ability of the Z- firms, half of which filed Chapter 7Score using data from 2007 and 2008 and bankruptcy. Firms with assets of less thanapply it to a group of firms. In addition to $1 million were eliminated from theusing current data, this paper extends sample. The Altman’s Z formula works wellcurrent research by utilizing Altman’s Z- provided the scores fall within the “in theScore with a new subset of firms: the retail tails,” meaning that low and high scoresindustry may more accurately predict financial distress than scores that fall in the grayLiterature Review area. More moderate scores may be easily misclassified (Moriarty, 1979). In the earlyWhat is Altman’s Z Score? 2000s, Altman amended the formula to allow its application to certain situations Altman’s Z is one of the best known, not originally included in the originalstatistically derived predictive models used sample set (Altman, 2006).to forecast a firm’s impending bankruptcy(Moyer, 2005). Edward Altman, a financial Constructing Altman’s Z-Scoreeconomist and professor at New York’sStern School of Business, developed The Altman Z-Score, based onAltman’s Z (the Z-Score) in 1968.The Z-Score discriminant analysis, includes basicEconomics & Business Journal:Inquiries & Perspectives 124 Volume 3 Number 1 October 2010
  4. 4. Efficacy of Altman’s Z to Predict Bankruptcy Hayes, Hodge & Hughesfinancial ratios as inputs (Calandro, 2007). upcoming problems. Last, X5 is a standardTo determine the formula, Altman utilized turnover measure; however, this variesfive common business ratios and greatly from industry-to-industry and issystematically weighted them in his omitted when non-manufacturing firms arecalculations. Some research has shown that studied.the model is 72 to 80 percent accurate in In response to requests for apredicting bankruptcy one to two years in measure to predict the likelihood ofadvance. The accuracy rate depends largely bankruptcy for non-manufacturing firms,on the industry and other factors relevant Altman developed the Z” Model, (Altman &to the industry. Hotchkiss 2006). This alternative model Although Altman’s formula has been was designed for non-manufacturingdescribed in many of the works cited here, industrials. This is model that was employedwe will provide a description of its in the investigation reported in this study.construction and an overview of two of the The formula, which differs from the originalthree versions of the formula that have formula presented above, is:been studied. The Z-Score was originally Z” = 6.56 X1 + 3.26 X2 + 6.72 X3 +constructed as: 1.05 X4 Z = 1.2X1 + 1.4X2 + 3.3X3 + .6X4 = 1.0X5, wherewhere X 1= (current assets – current liabilities) / total assets X1 = working capital / total assets X2= retained earnings / total assets X2 = retained earnings / total assets X3= earnings before interest and taxes X3 = earnings before earnings and / total assets taxes / total assets X4= book value of equity / total X4 = market value of equity / book liabilities value of debt X5 = sales / total assets. The variable of X5, found in the original Z-score for manufacturing firms, is Altman employed X1 because the omitted in Z”. This variable representedratio measures liquid assets in relation to sales/total assets, and Altman removed thisthe firm’s size. The most widely used variable when calculating the score for non-current and acid test ratios do not predict manufacturers because this turnover ratioas effectively as this measure. X2 measures is likely to be significantly higher for retaila firm’s earning power; failure rates are and service firms as compared toclosely related to this ratio. The X3 ratio manufacturing firms. In other words, if themeasures operating efficiency separated original model was employed to predictfrom leverage effects. This part of the bankruptcy in non-manufacturing firms, theequation recognizes operating earnings are scores would underpredict bankruptcy fora key to long-run viability. Altman added these firms because of their lower capitalthe market to the equation by including X4; intensity.security price changes may foreshadowEconomics & Business Journal:Inquiries & Perspectives 125 Volume 3 Number 1 October 2010
  5. 5. Efficacy of Altman’s Z to Predict Bankruptcy Hayes, Hodge & HughesInterpreting Altman’s Z-Score lower suggests that bankruptcy is likely. For all three interpretations, the score’s Altman’s Z is commonly employed predictive probability is 95 percent withinto assess financial distress. Altman’s Z is a one year and 70 percent within two years ofweighted composite of financial indicators the data used to compute the score. In eachrelating to profitability, revenue, slack of these three versions the coefficientsresources, and market return (Altman, differ to represent the nuances of the1968). When interpreting Altman’s Z-Score, industry situations (see Caouette, Altman,higher values indicate that firms “carry out Narayanan [1998] for coefficients for eachmore actions at a fast pace, while low version of the formula).scores indicate that firms carry out few In the Z” formula, which is employedtotal actions and respond slowly” (Ferrier, in this study, scores of 2.6 and greaterMac Fhionnlaoich, Smith, & Grimm, 2002). indicate that the firm is in a safe zone.In this section, we discuss the different Scores ranging from 1.1 to 2.6 represent thecutoff criteria for interpreting the score. grey zone. The distress zone includes scores Once a Z-Score has been below 1.1.determined, the ratio is then compared to Early scholars criticized Altman’sAltman’s predetermined cutoffs. Altman formula as having a poor record aspostulated that companies with a Z-Score predictor despite Altman’s explanation for a<1.8 were likely to experience bankruptcy, bankruptcy. Altman claimed thatcompanies with a Z-score 1.8 to 2.99 were predictions varied due to the instability ofin a zone of ignorance, or a grey zone in relationships among the variables withinwhich distress may or may not be the equation over time. Statistical modelsimpending. Last, companies with a Z-score based on financial data may appear toof >2.99 were likely to be financially describe events, but they are notsound. However, there is no single formula necessarily good at predicting outcomesthat has the power to predict the future; Z- (Moyer, 1977). For example, in a study withScore users should look at the trend of the public accounting professionals, Altman’s Zbusiness over time as they interpret the was found to misclassify over 50 percent ofscore rather than just looking at the score the firms used in the study as bankrupt anditself, which is only a snapshot in time. 29 percent as not bankrupt (Moriarty, Three commonly used 1979). As a result of these and other similarinterpretations of the Altman’s Z-score findings, the formula was studied for use ininclude the following: (1) For public different industry contexts.manufacturing firms, a Z-score of 3.0 or In a test of Altman’s Z in a moregreater shows solvency, while a score of 1.8 current business climate, Grice and Ingramor lower indicates likely distress. (2) For (2001) found inconsistent results. Inprivate manufacturing firms, the gray area response to their research questions: (1)narrows with a positive score being 2.9 or the formula was not found to be as useful ingreater and the likelihood of bankruptcy at predicting distress in more contemporary1.23 or lower. (3) For private, non- firms than when first developed (2) nor wasmanufacturing firms, a score of 2.6 or it as effective in predicting bankruptcy forgreater indicates that impending non-manufacturing as for manufacturingbankruptcy is unlikely and a score of 1.1 or firms. The formula was found to be asEconomics & Business Journal:Inquiries & Perspectives 126 Volume 3 Number 1 October 2010
  6. 6. Efficacy of Altman’s Z to Predict Bankruptcy Hayes, Hodge & Hughesuseful in predicting bankruptcy as it was to firm can continue to borrow from its bank)predict other distress conditions. (Alexeev & Kim, 2008) Carton and Hofer (2006)Performance Literature investigated a variety of common performance metrics. The optimal metric Although Altman’s Z is typically used for providing “the greatest relativeto predict bankruptcy, it is “also an information about the market-adjustedimportant multidimensional measure of return to shareholders” was found to bestrategic performance” (Chakravarthy, Altman’s Z-Score. Altman’s formula1986) in that it is a “composite measure of appeared to rate higher than otherprofitability, cash flow, slack, and stock performance metrics such as the widelymarket factors (Altman, 1968). High Z used return ratios (i.e., ROE & ROA),scores indicate strong financial health while economic profit, growth rate of sales, cashlow scores indicate financial distress (Ferrier flow, and expenses. Carton and Hoffer’set al., 2002). primary message is that Altman’s Z-score is Altman’s Z has also been used to more than a financial distress predictor; it isexplore the potential for bankruptcy in also efficacious as a performancehospitals. The study using hospitals management tool.revealed that both discriminant analysis andlogistic regression models are able to Methodpredict service organizations’ success orfailure, with the latter being more In this study, we sought to applypredictive in a sample of 65 hospitals (Al- Altman’s Z-Score to a more contemporarySulaiti, & Almwajeh, 2007). Liquidity and analysis in a rapidly changing businessprofitability ratios had the highest environment. This section contains acontribution to the results of the Z-score, description of the company selectionfollowed by productivity and efficiency. criteria. First, only public retail firms with a In 2007, Kim studied the robustness declared bankruptcy during 2007 or 2008of the Altman’s Z-Score model under the were considered. The eligible firms wereassumption that it was no longer significant further constrained to only include thosedue to market factors. Kim found that the companies with: (1) no bankruptcy filingsZ-Score seems to be a predictor of financial for at least 10 years prior to the perioddistress in firms one year prior to under study; (2) assets greater thanbankruptcy, but that the calculations $1,000,000, and (3) complete financialneeded to be used with caution because of information for the period underthe significance of some of the variables. consideration.Kim cautions that Z-Score predictions for Next, comparable companies wereperiods longer than one year have lost selected for each retail firm that remainedsome of their significance. In a study of after applying the selection filters.South Korean firms, a low Altman’s Z-score Comparable firms were identified from thewas found to be a significant predictor of key competitor information listed onfinancial distress for those firms using the Yahoo! Finance and/or directly fromsoft budget constraint (SBC), such as in company documents. Each qualifyingbank lending (i.e., a financially distressed comparable company was required to be aEconomics & Business Journal:Inquiries & Perspectives 127 Volume 3 Number 1 October 2010
  7. 7. Efficacy of Altman’s Z to Predict Bankruptcy Hayes, Hodge & Hughespublic company with no bankruptcy filings peer firm, Jo-Ann Stores, Inc. showduring the preceding ten-year period, have relatively high values for X1. In fact, the Jo-complete financial information, and show Ann Stores, Inc. showed a lower X1 valueassets greater than $1,000,000. than did Hancock Fabrics and it did not Four pairs of firms for 2007 and for declare bankruptcy. Additional study of the2008 satisfied the aforementioned criteria effectiveness of Altman’s Z” score may beand are the basis for our study. The Altman warranted for this particular subset of theZ” model was designed for retail industry.nonmanufacturing firms and it is the The next pair of firms examinedappropriate model for retail firms. Financial during 2007 fell into the category of homeinformation was retrieved from Reuters. To entertainment specialty retailers. Theassess the predictive ability of Altman’s Z” Altman Z” Score accurately predictedmodel in the retail industry, the Z” is financial distress for the bankrupt company.calculated and compared for each pair of The financial data of Movie Gallery, Inc.identified companies. A detailed discussion indicated a Z” Score of -1.04. Clearly thisof each comparison follows in the Findings score is in the distress zone. The firmsection. selected for comparison, Blockbuster, Inc., had a Z” Score of -4.17 based on December,2007 Investigation 2006 financial data. The Blockbuster score is indicative of financial distress. However, if The 2007 Altman Z” analyses results one looks at X2 for Blockbuster, one wouldare summarized in Table 1. The table see that it is high (relatively) and is drivenprovides detailed information on the by the large negative retained earningsbankrupt firms’ filing dates, fiscal year end which resulted from the losses during 2004(FYE) dates, together with the calculated Z” and 2005. Blockbuster’s results areScores and distress determinations. primarily driven by the accumulated deficitAdditional information regarding input of $4,781,900,000. 2004 was a particularlyratios was provided in the previous difficult year for Blockbuster where it lostdiscussion regarding constructing the Z- approximately $1.2 billion. AlthoughScore. Blockbuster has not formally declared The first pair of firms conducted bankruptcy at the time of this paper, thebusiness as retail fabric companies. Altman scoring method may still beHancock Fabrics, Inc. declared bankruptcy predictive of future financial distress for thisin March 2007, yet the calculated Z” Score company. Blockbuster was issued a “goingof 5.27 placed the firm squarely in the safe concern” warning in April, 2009 due tozone. This result is primarily driven by an ongoing negotiations to restructure andunusually high value for the X1 variable. substantially write down a $40 million termThe variable, X1, is the relationship between loan (Blockbuster, 2009). In this case, thenet working capital and total assets, and it Altman Z” Score provided more than 2is heavily weighted in the Z” calculation. years warning of financial distress.Altman found the measure of the percent Due to the uncertainty ofof assets supporting operations was highly Blockbuster’s financial position, a secondsignificant in the prediction of financial peer firm, Netflix, Inc., was selected as adistress. Both Hancock Fabrics, Inc. and the comparator. The Netflix financial dataEconomics & Business Journal:Inquiries & Perspectives 128 Volume 3 Number 1 October 2010
  8. 8. Efficacy of Altman’s Z to Predict Bankruptcy Hayes, Hodge & Hughesindicated a Z” Score of 5.27 which places 2007 period. The Z” Score correctlythe company firmly in the safe zone. Netflix categorized Harvey Electronics Inc. in ahas not filed bankruptcy. position of financial distress with a score of The third pair of companies -2.85.investigated are both consumer electronics The results of our 2007 dataretailers. Tweeter Home Entertainment comparisons strongly support the use ofGroup Inc. declared bankruptcy in June, Altman’s Z” score as a predictive measure2007. The Altman Z” Score, -2.01 accurately of financial distress. The method accuratelypredicted financial distress for this firm classified eight of the nine firms underbased on financial data posted nine months investigation. Given attention to both Z”prior to the filing. The comparable firm, Scores and other indicators, managers andBest Buy Co., Inc.’s calculated Z” Score of investors of these firms would have4.54 clearly places it in the safe zone. accurately predicted their condition of Still another bankrupt consumer financial distress or eustress.electronics retailer was evaluated for the Table 1 2007 Selected Retail Firms: Calculated Altman Z” Scores Z ScoreCompany Name Status FYE Analysis Date Z” Score ZonePair Number OneHancock Fabrics, Inc. Filed 3/07 1/31 1/06 5.27 SafeJo-Ann Stores, Inc. Peer Firm 1/31 1/06 4.19 SafePair Number TwoMovie Gallery, Inc. Filed 10/07 12/31 12/06 -1.04 DistressBlockbuster, Inc. Peer Firm 12/31 12/06 -4.17 DistressNetflix, Inc.* Peer Firm 12/31 12/06 5.27 SafePair Number ThreeTweeter HomeEntertainment Group, Inc. Filed 6/07 9/30 9/06 -2.01 DistressBest Buy Peer Firm 3/31 3/07 4.54 SafePair Number FourHarvey Electronics, Inc. Filed 12/07 10/31 10/06 -2.85 DistressBest Buy Co., Inc. Peer Firm 3/31 3/07 4.54 Safe* Netflix, Inc. was selected as a peer firm due to the distress rating of BlockbusterEconomics & Business Journal:Inquiries & Perspectives 129 Volume 3 Number 1 October 2010
  9. 9. Efficacy of Altman’s Z to Predict Bankruptcy Hayes, Hodge & Hughes2008 Investigation 2008 operated in the footwear industry. The calculated Z” Score of .82 for Shoe The 2008 analyses are summarized Pavilion, Inc. correctly places the firm in thein Table 2. The table provides detailed distress zone. Shoe Pavilion filedinformation on the bankrupt firms’ filing bankruptcy in July of 2008. Conversely, indates, fiscal year end (FYE) dates, together the comparator firm, Bakers Footwearwith the calculated Z” Scores and distress Group, Inc., the financial ratios indicated adeterminations. Additional information distress rating (Z” = -2.26). The scoreregarding input ratios was provided indicates that Bakers will likely experiencepreviously in this paper. financial difficulties in the future. Despite The first pair of companies operates the lack of a bankruptcy filing, the Z” Scorewithin the retail consumer electronics still has predictive ability for future financialindustry. At the date of filing, the Circuit distress, which is supported by moreCity Stores, Inc. bankruptcy was the largest current news reported. In April, 2009,retail Chapter 11 bankruptcy since Kmart Reuters reported on the performance offiled for bankruptcy in 2002. The Z” Score of Bakers during their fiscal year 2008 (Bakers,2.38 places the firm in the grey zone. Given 2009). The company’s independent auditorthe magnitude of the Circuit City issued a “going concern” warning. Thebankruptcy filing and the limited revelation warning was based on a potential inabilityof the Z” Score, the Altman Z” failed to to comply with financial covenants whichclearly show that Circuit City was headed led the auditor to express “substantialfor bankruptcy. The comparator firm, Best doubt about whether the company canBuy Co., Inc., displayed a calculated Z” score continue as a going concern.” Again, whileof 3.01. This score places Best Buy, Co., Inc. Bakers had not filed bankruptcy at thatin the safe zone. point in time, the Z” Score, based on pre- Sharper Image Corp. and RadioShack 2008 data accurately predicted a distressCorp. are specialty retailers in consumer condition. The Z” Score can also provideelectronics and gadgetry. The calculated Z” information across time periods, ratherScore of -0.96 for Sharper Image predicted than a snapshot at the fiscal year end.its subsequent bankruptcy. Similarly, the Z” Further examination of Bakers revealed a Z”Score of 5.75, which ranks RadioShack in score of .95 in January, 2007. Based onthe safe zone, is also predictive. these results, the financial condition of the Whitehall Jewelers Holdings, Inc. company is clearly deteriorating further intodeclared bankruptcy midway through its distress conditions. These results arefiscal year 2008. Therefore, Z” Scores were supported by the going concern, reportedcalculated based on available financial data above, that was issued approximately twoat both six- (Z” = -2.12) and 18-months (Z” = years after the January, 2007 data used to-1.27) prior to the filing. The Altman’s Z” calculate our initial Z” Score.Score was found to be predictive of Due to the financial situationfinancial distress on both dates and ranked surrounding Bakers Footwear Group, Inc. anthe firm in the distress zone. The peer additional peer firm was selected forjewelry retailer, Zales, was found to rest in comparison purposes. An examination ofthe safe category with a 6.68 rating. the financial information for Brown Shoe The final set of firms examined in Co., Inc. revealed a relatively high Z” ScoreEconomics & Business Journal:Inquiries & Perspectives 130 Volume 3 Number 1 October 2010
  10. 10. Efficacy of Altman’s Z to Predict Bankruptcy Hayes, Hodge & Hughesof 4.84, placing this firm in the safe strong cue that a strategy does not yield thecategory. expected results, Altman’s Z is argued by In summary, for the set of firms some to be broad enough of an indicatorstudied during 2008, the ability of the for managers to notice” (Ferrier et al.,Altman Z” score to predict financial distress 2002). In other words, Altman’s Z may bewas successful in eight of the nine employed to indicate financial distress.companies under study. The remaining firm In this study, we have endeavored toproduced ambiguous results, ranking in the show the efficacy of the Altman’s Z” Scoregrey classification to only later declare one in predicting financial distress in retail firms.of the largest Chapter 11 retail bankruptcies In eight comparisons, four each in 2007 andsince 2002. 2008, of bankrupt versus non-bankrupt firms in retail specialties, the Z” ScoreConclusions accurately predicted bankruptcy filing 94% of the time and accurately predicted “Although many performance financial distress over 90% of the time.indicators cannot be expected to incur a Table 2 2008 Selected Retail Firms: Calculated Altman Z” Scores Z ScoreCompany Name Status FYE Analysis Date Z” Score ZonePair Number OneCircuit City Stores, Inc. Filed 11/08 2/28 2/08 2.38 GreyBest Buy Co., Inc. Peer Firm 3/31 3/08 3.01 SafePair Number TwoSharper Image Corp. Filed 2/08 1/31 1/07 -0.96 DistressRadioShack Corp . Peer Firm 12/31 12/06 5.75 SafePair Number ThreeWhitehall JewelersHoldings, Inc* Filed 6/08 1/31 1/08 -2.12 Distress 1/07 -1.27 DistressZale Corp. Peer Firm 7/31 7/07 6.68 SafePair Number FourShoe Pavilion, Inc. Filed 7/08 12/31 12/07 0.82 DistressBakers FootwearGroup, Inc. Peer Firm 1/31 1/08 -2.26 DistressBrown Shoe Co., Inc.** Peer Firm 1/31 1/08 4.84 Safe*Z” scores are calculated for two FYE due to the date of the bankruptcy filing** Brown Shoe Co., Inc. was selected as a peer firm due to the distress rating of Bakers Footwear Group, Inc.Economics & Business Journal:Inquiries & Perspectives 131 Volume 3 Number 1 October 2010
  11. 11. Efficacy of Altman’s Z to Predict Bankruptcy Hayes, Hodge & Hughes Our goal has not been to suggestthat Altman’s Z” is an end-all solution to Referencespredicting financial distress. However, wedo suggest that it resides in the manager’s Administrative Office of U.S. Courts. (2009). Bankruptcy statistics. Information retrieved onand investor’s toolbox for diagnosing the July, 2009, frompossibility of future financial distress in http://www.uscourts.gov/bnkrpctystats/bankrufirms. The Z” Score remains efficacious, and ptcystats.htmit is also useful in public, non-manufacturing Alexeev, M., & Kim, S. (2008). The Korean financialfirms provided that other important data crisis and the soft budget constraint. Journal of Economic Behavior & Organization, 68(1), 178-are considered in parallel. As with any 193.financial tool Altman’s Z should contribute Al-Sulaiti, K.I., & Almwajeh, O. (2007). Applyingto a decision and not be relied on as the Altman Z-score model of bankruptcy on servicelitmus test for investment decisions. organizations and its implications on marketing Although Altmans Z Score has been concepts and strategies. Journal of International Marketing & Marketing Research, 32(2), 59-74.employed as a distress metric in areas such Altman, E.I. (1968). Financial ratios, discriminantas merger and acquisition analysis, credit analysis and prediction of corporate bankruptcy.risk analysis, and turnaround management, Journal of Finance, 23(4), 189-209.it has only recently been employed in Altman, E.I. (2006). Corporate financial distress andperformance management (Calandro, bankruptcy: Predict and avoid bankruptcy, analyze and invest in distressed debt. Hoboken,2007). However, the formula is not without NJ: Wiley.its empirical support (Carton & Hofer, Altman, E.I., & Hotchkiss, E. (Eds.). (2006). Corporate2006). financial distress and bankruptcy: predict and Several variations of Altman’s Z avoid bankruptcy, analyze and invest in rdexist. Although, the formula has been distressed debt (3 ed.). Hoboken, NJ: Wiley. Bakers Footwear Group Reports Fourth Quarter anddemonstrated to be fairly predictive in a Fiscal 2008 Results. (2009, April 15). Thomsonvariety of contexts and cultural settings, it is Reuters. Information retrieved fromnot designed to be used in every situation. http://www.reuters.com/article/pressRelease/Variations of Altman’s Z encompass publicly idUS99202+15-Apr-2009+BW20090415.versus privately held firms and Blockbuster gets going concern notice-SEC filing. (2009, April 6). Thomson Reuters. Informationmanufacturing versus privately held non- retrieved frommanufacturing firms. There is also the http://www.reuters.com/article/rbssRetailSpeciquestion in extant literature as to whether alty/ idUSN0641432620090406or not smaller firms require a different Calandro, J. (2007). Considering the utility offormula. Altman’s Z has typically been used Altman’s Z-score as a strategic assessment and performance management tool. Strategy &to analyze firms with assets from $1 million Leadership, 35(5), 37-43.to $100 million. Caoette, J.B., Altman, E.I., Narayanan, P., & Nimmo, As a result of our findings, we R. (1998). Managing Credit Risk: The Greatsuggest that further exploration of Altman’s Challenge for Global Financial Markets. Wiley.Z score, and alternative formulas, is Carton, R.B., & Hofer, C.W. (2006). Measuring organizational performance: Metrics fornecessary to refine this potentially useful entrepreneurship and strategic managementtool in order to develop a predictive research. Northampton, MA: Edward Elgar.collection of tools useful in predicting not Chakravarthy, B.S. (1986). Measuring strategiconly bankruptcy, but financial distress in a performance. Strategic Management Journal,variety of firms in a variety of contexts. 7(5), 437-458,Economics & Business Journal:Inquiries & Perspectives 132 Volume 3 Number 1 October 2010
  12. 12. Efficacy of Altman’s Z to Predict Bankruptcy Hayes, Hodge & HughesFerrier, W.J., Mac Fhionnlaoich, C., Smith, K.G., & Moriarty, S. (1979). Communicating financial Grimm, C.M. (2002). Impact of performance information through multidimensional graphics. distress on aggressive competitive behavior: A Journal of Accounting Research, 17(1), 205-224. reconciliation of conflicting views. Managerial & Moyer, S.G. (2005). Distressed debt analysis: Decision Economics, 23, 301-316. Strategies for speculative investors. FortGrice, J.S., & Ingram, R.W. (2001). Tests of the Lauderdale, FL: Ross Publishing. generalizability of Altman’s bankruptcy prediction model. Journal of Business Research, 54(1), 53-61.Kim, B.J. (2007). Bankruptcy prediction: Book value or market value? Paper presented at 2007 APRIA Annual Meeting.Economics & Business Journal:Inquiries & Perspectives 133 Volume 3 Number 1 October 2010
  13. 13. Efficacy of Altman’s Z to Predict Bankruptcy Hayes, Hodge & Hughes Appendix Altman Z” Calculated ValuesCompany Name X1 X2 X3 X42007 AnalysesHancock Fabrics, Inc. 0.4397 0.7223 -0.0731 0.4994Jo-Ann Stores, Inc. 0.3900 0.2921 -0.0079 0.7296Movie Gallery, Inc. -0.0250 -0.3846 0.0835 -0.1701Blockbuster, Inc. 0.0501 -1.5255 0.0235 0.3000Netflix, Inc. 0.3860 -0.0667 0.1071 2.1285Tweeter Home Ent. Grp. 0.1520 -0.9296 -0.0530 0.3582Best Buy Co., Inc. (3/07) 0.2049 0.4058 0.1473 0.8415Harvey Electronics, Inc. 0.0522 -0.6696 -0.1652 0.09522008 AnalysesCircuit City Store, Inc. 0.2226 0.2619 -0.0944 0.6702Best Buy Co., Inc. (08) 0.0449 0.3083 0.1694 0.5419Sharper Image Corp. 0.0807 0.0311 -0.3731 0.8750RadioShack Corp. 0.2973 0.8603 0.0758 0.4617Whitehall Jewelers Hold., Inc. (07) 0.0013 -0.1223 -0.1253 -0.0184Whitehall Jewelers Hold., Inc. (08) 0.2614 -0.5563 -0.3279 0.1747Zale Corp. 0.4943 0.5379 0.0526 1.2688Shoe Pavilion, Inc. 0.2587 -0.0671 -0.1692 0.4513Bakers Footwear Grp., Inc. -0.1036 -0.1938 -0.2278 0.5517Brown Shoe Co., Inc. 0.3030 0.3609 0.0878 1.0320Economics & Business Journal:Inquiries & Perspectives 134 Volume 3 Number 1 October 2010