The Use of Z-Scores to Predict Finance Company Collapses: A Research Note

Authors:
Grant Samkin, The University of Waikato
Mary Low, The University of Waikato
Tracy Adams, The University of Waikato

Abstract: This research note makes use of Z’-scores to establish whether they could have been used to predict the collapse of New Zealand finance companies. The financial statements of 20 finance companies were analysed over the five-year period immediately prior to their collapse. The Z’-score and its trend over the period were evaluated against Altman’s criteria to determine the likelihood of failure. In the five-year period prior to their collapse, the majority of companies had Z’-scores which suggested failure was imminent. This study recommends that companies include failure prediction models in their financial statements or as part of the financial ratios published in a financial review or trend statement. This additional information is likely to increase investor confidence through their ability to make more informed decisions.