The macroeconomic and microeconomic factors influencing financial distress: A comparison of Altman's 1983 and 1993 bankruptcy prediction models (Edward I. Altman)

For over thirty-five years researchers have studied the phenomenon of financial distress associated with firms using a variety of methodologies for predictive purposes. No studies have analyzed both the macroeconomic and microeconomic aspects of failure prediction as applied to publicly traded retail firm industry.; The intent of this study was to employ Altman's (1983) and Altman's (1993) bankruptcy prediction models to examine significant differences in means between failed and nonfailed firms using the two models. As a corollary examination, complementary tests of classification accuracy comparisons founded in Z-test equations were used to determine if one model produced a higher level of accuracy. Further the influence of macroeconomic aspects specifically related to recession, and the relationships and correlations of firm size and growth as they relate to the failure of an enterprise at the microeconomic level for the population of interest for retail firms was studied.; Standard and Poor's Research Insight Database was used to develop samples tested in this study. Samples consisted of 70 bankrupt and 70 nonbankrupt firms for the period January 1, 1984 through July 31, 2000 or a total of 140 firms. A significant difference in mean Z-Scores was evidenced between failed and nonfailed firms using both bankruptcy prediction models. The level of predictive accuracy of Altman's (1993) revised four-variable bankruptcy model wren applied to retail firms was greater than 50% for all three years tested while the level of predictive accuracy of Altman's (1983) revised five-variable bankruptcy model when applied to retail firms was less than 50% in years two and three and greater than 50% in year one. The Z-test for overall accuracy was statistically significant for years one and two for Altman's four-variable model compared to Altman's five-variable model. However, year three of the overall accuracy comparison was not statistically significant.; Additionally, no significant difference was found between failed firm's mean Z-Scores for recessionary versus nonrecessionary periods. With the exception of compound average rates of growth for Altman's 1993 bankruptcy prediction model, no significant difference was found in various growth and size tests employed using Altman's two bankruptcy prediction models.