IIARD International Institute of Academic Research and Development

Journal of Accounting and Financial Management (JAFM )

E-ISSN 2504-8856
P-ISSN 2695-2211
VOL. 10 NO. 12 2024
DOI: 10.56201/jafm.v10.no12.2024.pg66.80

---

Altman’s Z-Score and the Prediction of Corporate Failure in Nigeria: Analysis of the Banking Sector

Dr. (Mrs) Adigwe Pretty Dennis

---

Abstract

This study investigates the use of financial ratios to predict financial stability, focusing on Nigerian commercial banks from 2011 to 2020. It highlights Altman’s Z-score model, which assesses insolvency risk through key indicators such as liquidity, profitability, growth, and valuation ratios. An analysis of twelve banks showed Z-scores below the critical threshold of 1.81, indicating financial distress. While the Z-score model effectively forecasts potential bankruptcy, its applicability in Nigeria is limited by challenges such as regulatory volatility and shifting government policies. The study identifies the working capital to total assets (WCTA) ratio as a significant determinant of Z-scores in these banks. To improve financial soundness assessments, the study recommends adopting the Z-score model as an early warning system for bankruptcy detection. However, it also emphasizes the need to incorporate factors specific to the Nigerian context, such as economic policy changes and industry-specific risks, to enhance prediction accuracy.

keywords:

Altman z-score, Corporate Failure, Banking Sector, Accounting.

---

References:

Abdirashid, Y. A. (2017), Factors causing corporate financial distress in Kenya's

commercial
banking sector: A case of chase bank (A Research Project Proposal),

Chandaria
School
of
Business.
Retrieved
from

http://erepo.usiu.ac.ke/handle/11732/3473;jsessionid=00E8B2C8D8E6EA3DE
Al-Raw, (2008). The use of Altman equation for bankruptcy prediction in an
industrial

firm
(case
study),
International
Business
and
Economics
Research

Journal,7(7), 115-2.
Altman, E. (1968). Financial ratios, discriminant analysis and the prediction of
corporate

bankruptcy. Journal of Finance, 23(4).4-12.
Altman, E., Haldeman, R. G., & Narayanan, P. (1977). ZETA analysis: A new model
to

identify bankruptcy risk of corporations. Journal of Banking and Finance, 1(1),
13
Altman, E. I. (2008). Financial Ratios, discriminant analysis and the prediction of corporate

bankruptcy. The Journal of Finance, 23(4), 37-81.
Altman, E. I., Hartzell, J., & Peck, M. (1995). Emerging market corporate bonds: A

scoring
system”. Emerging Market Reviews. New York, Salomons brothers’

publishers, 12-41.
Amadasu, D. E (2012). Bank Failure Prediction. An International Journal of Arts and

Humanities, 1(4), 250-265.
Anyum, S. (2012). Business bankruptcy prediction models: a significant study of the

Altman’s z-score model”, Asian Journal of Management Research, 3(1), 212-219.
Argenti, J, (1976). Corporate Collapse: The Causes and Symptoms. McGraw Hill.
Azhar, N., Lokman, N., Alam, M & Said, J. (2021). Factors determining Z-score and

corporate failure in Malaysian companies. International Journal of Business
and

Research, 21(3), 21-45.
Baruch L. (2014). Financial statement analysis: A New Approach”, Englewood
Cliffs,

New Jersey: Prentice-Hall, Inc .31-60.
Beaver, W. (1966). Financial ratios as predictors of failure. Journal of Accounting Research,

3(12), 212-34.
Beaver, W. (2001). Financial ratios as predictors of failure” empirical research in

accounting: selected studies, Supplement to Journal of Accounting Research,

41(4), 71-111.



Beaver, W. (2017). Financial Statement Analysis”, Handbook of Modern Accounting,
eds

Davidson, S. and Wall, R., 2nd edition. McGraw-Hill, 21-30.
Beaver, W. H. (2001). Financial ratios as predictors of failure. Journal of Accounting

Research,3(2), 8-21.
Belfo, F., & Trigo, A. (2013). Accounting information system: Tradition and Future

Directions. International Conference on Health and Social Care Information

Systems and Technologies, 9(1), 536-546.
Bello, M. A., Kofarmata, B. A. & Falola, A. J. (2016). The relevance of financial ratio

analysis in predicting business failure in Nigeria: A study of selected
companies.

Abuja Journal of Business Management, 3(5), 21-28.
Bird, R. G., & McHugh A. J. (2017). Financial ratios: An empirical study. Journal of

Business Finance and Accounting, 4(1), 29-45.
Block, S. B. (2009). A study of financial analysis: practice and theory”, Financial Analysts

Journal, 55(4), 10-52.
Bondoc, M. D. &Taicu, M. (2013). Expense’s analysis is based on the profit and loss

account information provided by the company performance diagnosis stage

annals of the University of Petroani, Economics,13(1), 5-l4.
Brealey, R., & Myers, R. (2013). Principles of corporate finance. The McGraw-Hill

Companies. 11-30.
Brigham, E., & Houston, J. (2008). Fundamentals of financial management”, South

Western College Publishers, 16-29.
Chieng, (2013). Verifying the Validity of Altman’s Z” Score as a Predictor of Bank Failures in

the Case of the Eurozone, (Msc. thesis) National College of Ireland.

http://norma.ncirl.ie/865/1/jasminechieng.pdf.
Collis, J., & Jarvis, R. (2012). Financial information and the management of small
private

companies. Journal of small business and Enterprise Development,
9(2), 100-110.
Cybinski, P. J. (2000). The path to failure: Where are bankruptcy studies now.
Journal of

Business and Management, 7(1), 11-39.
Dadepo, I. (2017). Financial ratios as a measure of performance of deposit money banks
in

Nigeria in post-2005 consolidation. Journal of Arts & Science, 5(10),
1
Damilola, D. A. (2007). Corporate Finance Issues, Investigations, Innovations and

Application.
2nd edition, Lagos: High Rise Publications, 34-86.
Dave, A. R. (2012). Financial management as a determinant of profitability. South Asian

Journal of Management 19(1), 124-137.
David, A. O. (2014). Code of ethics and professionalism: Implication for bank failure
in

Nigeria. Research Journal of Finance and Accounting, 5(19), 75-86.



Edwin, M. (2021). Corporate governance reform and corporate failure in the UK. Company

Lawyer, 42 (4), 109-119.
Emekekwue, P. E. (2008). Corporate Finance Management. 5th Revised edition; Kinshasha:

African Bureau of Educational Sciences, 43-67.
Foster, G. (2000). Financial statement analysis”. 2nd Edition. Englewood Cliffs, New

Jersey: Prentice Hall, Inc, 2-7.
Ganesalingam, S., & Kumar, K. (2001). Detection of financial distress via multivariate

statistical analysis. Journal of Managerial Finance, 27(4), 45-55.
Geise1, A., Kuczmarska, M., & Paw?owski, J. (2021). Corporate failure prediction
of

construction companies in Poland: Evidence from logit model”, European Research

Studies Journal, 40(1), 99-116.
Goedhart, T. & Wessels, D. (2010). Valuation: Measuring & managing the value of

companies. 5th Edition, John Wiley & Sons, Hoboken, 30-35.
Gombola, M. J., & Ketz, J. E. (2013). A note on cash flow and classification patterns
of

financial ratios. Accounting Review, 63(1), 105-114.
Helfert, E. (2011). Financial analysis tools and techniques guide managers”, The McGraw

Hill Companies Inc. 21-40.
Hermanson, R. H., Edwards, J. D., & Michael, W. M. (2012). Accounting Principles.
5th

edition. Boston, MA Richard D. Irwin, Inc. 12-41.
Horrigan, J. (2008). A short history of financial ratio analysis. Accounting Review 6(2),
284
Horrigan, J. O. (2000). A short history of financial ratio analysis. Accounting
Review,

43(4), 284-294.
Horrigan, J. O. (2013). Methodological implications of non-normally distributed financial

ratios: a comment. Journal of Business Finance and Accounting,
10(4), 683-689.
Horrigan, J. O. (2015). Some empirical bases of financial ratio analysis. Accounting

Review, 7(2),558-568.
Inman, M. L. (2001). Towards identifying a meaningful discriminatory ratio. Journal
of

Management Accounting, 3(2), 44 – 57.
Kiyota, H. (2009). The efficiency of commercial banks in Sub-Saharan Africa: A

Comparative Analysis of Domestic and Foreign Banks. A paper prepared for
the

CSAE conference
2009 on “Economic Development in Africa” was held
at

the University of Oxford. 23-43.
Kristof, A. & Virag, L. (2020). A comprehensive review of corporate bankruptcy prediction

in Hungary. Journal of Risk Financial Management, 13(35), 1-20.



Kumbirai, I. & Webb, U. (2010). “A financial ratio analysis of commercial bank

performance in South Africa. African Review of Economics and Finance, 2(1),
30
Kurfi, A. K. (2003). Principles of Financial Management. Benchmark Publishers Ltd., 63.
Lakshan, A. M., & Wijekoon, H. N. (2013). The use of financial ratios in predicting

corporate failure in Sri Lanka”,GSTF Journal on Business Review (GBR), 2(4),
37
Lasher, I. & William, R. (2017). Practical financial management. St. Paul MN: West

Publishing Company, 4(1), 5-16.
Leahy, A. S (2010). The determinants of profitability in the pharmaceutical industry”,

American Journal of Health Sciences, 3(1), 37-42.
Lerner, E. N., & Carleton, W. T. (1996). A Theory of financial analysis. Harcourt, Brace and

World Publishers, Inc., New York, 1966, 3-13.
Lewellen, J. (2014). Predi

DOWNLOAD PDF

---

Back