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Efficacy Assessments of Z-Score and Operating Cash Flow Insolvency Predictive Models Insolvency Predictive Models

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DOI: 10.4236/ojacct.2013.23009    3,301 Downloads   5,871 Views   Citations

ABSTRACT

This study examines the efficacy of Z-Score and operating cash flow as Corporate Insolvency prediction models in developing
cash economy. The research specific objectives are to determine the predictive efficacy of Z-Score and operating cash flow in discriminating between would fail and going concern companies, identify more effective model for predicting Corporate Insolvency between Z-Score and operating cash flow and assess the predictive ability across industries of the two models. Sixty-two corporate financial statements possessing flow-based insolvency symptoms were tested. Tools of analyses employed are ANOVA, Loglinear Analysis, Fredman ANOVA and Percentages. Z-Score predictive ability across Services and Merchandising sectors is found to be very poor but very strong on Manufacturing and Oil Services, while Operating Cash Flow model is found to be more effective in predicting accurately Service and Merchandising Sectors. The predictive efficacy of the two models significantly varies as the year becomes closer to the year of corporate failure. It is recommended that across industrial sectors, Z-Score model should be used for testing business failures in Manufacturing and Oil Services while Operating Cash Flow model is better employed in solvency stress test for Merchandising, Transport & Aviation and Service industrial sectors.

Conflicts of Interest

The authors declare no conflicts of interest.

Cite this paper

A. Unegbu and J. Adefila, "Efficacy Assessments of Z-Score and Operating Cash Flow Insolvency Predictive Models Insolvency Predictive Models," Open Journal of Accounting, Vol. 2 No. 3, 2013, pp. 53-78. doi: 10.4236/ojacct.2013.23009.

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