Can Altman Z-score Model Predict Business failures in Pakistan? “Evidence from Textile companies of Pakistan”

Abstract

Prediction of bankruptcy is one of the challenging tasks for every sort of organizations in different industries in the world. Asian countries like china India and Sri Lanka this model has been used several times. Pakistan Textile industry takes large part in economic development of Pakistan. But on the other hand Pakistan Textile industry is facing many problems like problem of Supply, financial constrains, electricity and gas shortage etc. This paper investigates whether Altman Z-score model can predict correctly company Failures in Pakistan? The empirical analysis examines 21 textile companies (12 stable companies and 9 bankrupted companies) listed in the Karachi stock exchange, during the period 2000 to 2010. In this study bankruptcy predications of Z score model is investigated for four years prior to bankruptcy. In this paper overall results of Z score model was also quite accurate. These results for bankrupted, non bankrupted shows that Altman model can give good predictions for textile sector of Pakistan. This is in line with other findings. The empirical results are interesting since they can be used by company management for financing decisions, by regulatory authorities and by portfolio managers in stock selection.

Keywords: Z-score model, company, business failure, bankruptcy