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Financial Characteristics of Distressed Firms: An Application of the Altman Algorithm Model
Author(s) -
AmoaGyarteng Karikari
Publication year - 2019
Publication title -
journal of corporate accounting and finance
Language(s) - English
Resource type - Journals
eISSN - 1097-0053
pISSN - 1044-8136
DOI - 10.1002/jcaf.22367
Subject(s) - bankruptcy , solvency , market liquidity , population , bankruptcy prediction , profitability index , commission , business , asset (computer security) , econometrics , economics , actuarial science , accounting , finance , computer science , medicine , computer security , environmental health
This article uses the discrete variables in the Altman algorithm model to describe the characteristics of firms as they approach bankruptcy. Data are drawn from 144 mining and oil and gas firms that declared Chapter 11 and Chapter 7 bankruptcy in the United States between 2006 and 2016. Part of the population eligibility criteria for the study is that firms should be publicly traded and should have filed form 10‐K reports with the Securities and Exchange Commission. A paired samples t ‐test shows that the Altman Z score, solvency, profitability, and asset productivity become statistically significantly worse when bankruptcy becomes imminent. The article further finds that there is no statistically significant change in liquidity and activity ratios of distressed firms as financial performance deteriorates. © 2019 Wiley Periodicals, Inc.