Bankruptcy Prediction: A Study of Predictive Power of Altman Model and its Predictors in Indian Corporate Sector
Gurmeet Singh & Dr. Ravi SinglaBankruptcy prediction is the interest area for many academicians and researchers. Many researchers developed the bankruptcy prediction models from time to time. Altman (1968) is a widely used model to predict corporate failure. The present research paper examines the predictive ability of the Altman’s model and its variables as predictors of bankruptcy in the Indian corporate sector. By using the sample of 37 defaulted and 37 non-defaulted companies matched by asset size and industry classification, we find that the predictive power of the model is higher in case of defaulted companies than non-defaulted companies. Since almost all the variables used in the model as predictors violates the assumption of normality, thus by applying the Mann-Whitney test and Spearman’s Correlation test we observe that all the variables have discriminating power between defaulted and non-defaulted companies and are found to be positively related to Z-score. Predictive power of Altman’s model is weaker in the case of non-defaulted companies which leads to decrease in overall accuracy rate of the model.