Model's Ability to Predict Bankruptcy Before it Happens

Abstract

This study aimed to demonstrate the ability of Altman Model's (z-score) in predicting and detecting financial difficulties that could lead to liquidation of commercial banks. In order to achieve the objectives of the study Altman (z-score) model is applied as comparative study for a local Jordanian commercial banks (Philadelphia Investment Bank) which was actually liquidated in 2001, in comparing with (Arab Jordanian Investment Bank) which was not liquidate. The period of this study stretch for five years prior to the incident filter, to find out how successful the predictive capacity of the model to give early warning on the probability of failure in the bank for each of those years. The results of the study found that Altman (z-score) model was able (up to 100%), to predict the failure of Philadelphia Investment Bank, especially at the first four years prior to liquidation, where the value of Z within less than (1.81). As for the fifth year it has signed in the medium category (gray area), where the value (Z) greater than (1.81), and less than (2.99), at this point the ability of the model show difficult to assess the situation of the Bank in that year, despite the near financial failure prediction for the fifth year.  For Arab Jordanian Investment bank the Altman (z-score) model was able (up to 100%), to predict that the bank is safe from failure, where the value of Z within more than (2.99). The study found a statistically significant relationship between the coefficient of Z and its ability to predict real liquidation of Banks.