The purpose of this study is to demonstrate potential problems associated with the use of bankruptcy prediction models in current research. The tests in this study demonstrate the problems that may arise when bankruptcy prediction models are inappropriately applied. This analysis evaluated the Zmijewski (1984) and Ohlson (1980) models using time periods, industries, and financial distress situations other than those used to originally develop the models. The findings indicated that both models were sensitive to time periods. That is, the accuracy of the models declined when applied to time periods different from those used to develop the models. The findings also suggest that the accuracy of each model continues to decline moving from the 1988–1991 to the 1992–1999 sample period. Additionally, Ohlson's (Zmijewski's) model was (was not) sensitive to industry classifications. The findings of this study also suggest that the Ohlson and Zmijewski models are not sensitive to financial distress situations other than those used to develop the models. Thus, the models appear to be more generally useful for predicting financial distress, not just bankruptcy.
Review of Quantitative Finance and Accounting – Springer Journals
Published: Oct 3, 2004
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