The relation within the Maltese context of Springate's Z-Score Measure and non-financial measures of predicting corporate failure : an investigation

Abstract

Corporate failure is an unpleasant affair that affects both the business community in general and even the overall economy and well-being of the country where the company operates. Naturally, those directly concerned, particularly company owners, management and its workers, suffer most. Financial failure forecasting is hence a subject which is of great interest to many scholars and businessmen alike, as it allows for timely decisions to be made relative to the reallocation of resources to more efficient uses. This dissertation reviews the research on the subject indicating the availability of several practical forecasting approaches. It tests empirically the relation of two such approaches - Springate's Z-Score and non-financial measures of predicting failure, among the local business setting. In addition, the potential application of the model developed by Altman is also examined. The data set for this purpose consisted of forty local manufacturing companies over the period 1999 - 2002. The findings of this study demonstrated that both methods compare favourably in distinguishing between failing and non-failing firms. However, it also became clear that companies which were found to be encumbered by a multitude of deficiencies and concurrently displayed failing values for Z, are not yet insolvent and there seem to be no indications that they will do so in the near future. The applicability of these methods in predicting failure within the Maltese environment therefore becomes questionable. Hence, the study proceeds to identify the underlying reasons for such non-applicability within the local business setting.