Test of the generalizability of Altman´s bankruptcy predication model

Although originally developed in 1968 using a small sample of firms from the 1950s and 1960s, Altman´s Z-Score model remains a commonly used tool for evaluating the financial health of companies. Because of the age of the model and other its attributes, such as its small sample of manufacturing firms and the use of equal group sizes of bankrupt and non-bankrupt firms, it is likely that the model is not as effective in classifying firms in more recent studies as it was when developed by Altman. This study examines three research questions using recent sample data: (1) Is Altman´s original model as useful for predicating bankruptcy in recent periods as it was for the periods in which it was developed and tested by Altman? (2) Is the model as useful for predicating financial stress conditions other than bankruptcy as it is for predicting bankruptcy? (3) Is it true/accurate that as time passes, the ability of the model to predict decreases correspondingly? Our results are consistent with positive answers to Questions 1 and 2 and a negative answer to Question 3.