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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-scoreCorporate FailureBanking SectorAccounting.

References

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