Predicting Bankruptcy Using Z-Score and Z Double Prime (Z”): A Study of Pakistan Stock Exchange
Abstract
Due to the unprecedented happenings and dynamic conditions of international economic system, firms are always at the verge of bankruptcy no matter how sound they are, their sustainability is always in jeopardy. Besides, lenders are continuously raising red flags and giving consistent warnings about possible perils of corporate failure due to fragile economic conditions and increasing debt levels in both corporate and individual businesses these days. Hence there was an exigency to ‘develop indicators for monitoring long term progress and sustainability of companies. Thereof it would contribute in illustrating to business analysts, firm stakeholders about the relevance of embracing these active checks for predicting bankruptcy as a sustainable business practice. This created a bizarre cult to look into the matter seriously. For this there is no mantra, no clever feats, sure-fire quick strategies. Instead there are well-defined, simple, systematic and sophisticated models to assess sustainability of companies. Thus, to avoid the tide of massive/substantial corporate failure and any future catastrophe; there is a dire need to identify the most suitable and preeminent model that can truly forecast the likelihood of default ahead of time in given circumstances. And, mainstay of this study is to provide an answer of question in hand by comparing two most venerable model choices i.e. Altman’s Z-score and Z double prime (Z”).
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