Efficacy Assessments of Z-Score and Operating Cash Flow Insolvency Predictive Models Insolvency Predictive Models

Abstract

This study examines the efficacy of Z-Score and operating cash flow as Corporate Insolvency prediction models in developing cash economy. The research specific objectives are to determine the predictive efficacy of Z-Score and operating cash flow in discriminating between would fail and going concern companies, identify more effective model for predicting Corporate Insolvency between Z-Score and operating cash flow and assess the predictive ability across industries of the two models. Sixty-two corporate financial statements possessing flow-based insolvency symptoms were tested. Tools of analyses employed are ANOVA, Loglinear Analysis, Fredman ANOVA and Percentages. Z-Score predictive ability across Services and Merchandising sectors is found to be very poor but very strong on Manufacturing and Oil Services, while Operating Cash Flow model is found to be more effective in predicting accurately Service and Merchandising Sectors. The predictive efficacy of the two models significantly varies as the year becomes closer to the year of corporate failure. It is recommended that across industrial sectors, Z-Score model should be used for testing business failures in Manufacturing and Oil Services while Operating Cash Flow model is better employed in solvency stress test for Merchandising, Transport & Aviation and Service industrial sectors.

EBITDA vs. Cash Flows in Bankruptcy Prediction on the Polish Capital Market

“…Due to these issues, the research on the usefulness of cash flows in financial distress prediction produced somewhat mixed results. Many researchers indeed found that various cash flow-based ratios are statistically significant predictors of the forthcoming bankruptcy (Ohlson, 1980;Gentry et al, 1985;Casey and Bartczak, 1985;Ward and Foster, 1997;Bhandari and Iyer, 2013;Unegbu and Adefila, 2013;Khan and Guruli, 2015). However, Gupta et al (2012), in their study of British small and medium-sized enterprises, found that the presence of operating cash flow information does not improve the prediction accuracy of the distress prediction models.…”