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Validity of Altman Z-Score Model to Predict Financial Failure: Evidence From

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Article in International Journal of Economics and Finance · July 2018

DOI: 10.5539/ijef.v10n8p181

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 International Journal of Economics and Finance; Vol. 10, No. 8; 2018
ISSN 1916-971X E-ISSN 1916-9728
Published by Canadian Center of Science and Education

Validity of Altman Z-Score Model to Predict Financial Failure:

Evidence From Jordan
Sufian Radwan Al-Manaseer1 & Suleiman Daood Al-Oshaibat1
1
Faculty of Business, Tafila Technical University, Tafila, Jordan
Correspondence: Sufian Radwan Al-manaseer, Faculty of Business, Tafila Technical University, AT-Tafila, P. O.
Box 179, Tafila, 66110, Jordan. E-mail: [Link]@[Link]

Received: June 7, 2018 Accepted: July 10, 2018 Online Published: July 20, 2018
doi:10.5539/ijef.v10n8p181 URL: [Link]

Abstract
This paper aims to investigate the Validity of Altman z-score model to predict financial failure in insurance
companies listed on Amman Stock Exchange (ASE) over the period 2011-2016. To achieve the goal of the study,
the study depended on the different statistics analytical method and Multiple Linear Regression through doing
the statistical analysis of the independent variables on the dependent variable related to the subject of the study
through the (E-views) program in order to cover the analytical part of the study, in addition to the descriptive
method through relying on books, periodicals, previous studies and financial reports of the insurance companies
of the study’ sample, whether the direct or the indirect ones, to cover the theoretical part. The result of the study
finds a high predictive power for Z-score model. Moreover, the findings reveal that Z-Score model could be
valuable instrumental indicators for many users of financial statement such as financial managers, auditors,
lenders, investors, to make right decisions in the face of financial failure.
Keywords: Altman, Z-score, insurance companies, financial failure, working capital, retained earnings, earnings
before interest and taxes, total assets, market capitalization, book value of total liabilities
1. Introduction
Different results of financial crises, that occurred in many countries of the world and had an impact, whether on
the short or long term, on the economies of developed and developing countries, have shown that the weak
disposition of investment and financial tools in the financial and investment institutions, leads to inconsistency in
achieving balance of liquidity, profitability and safety on one hand, and achieving growth and continuity of the
financial sector in a shape that benefits all of stakeholders (Aziz & Dar, 2006). If financial distress is not
detected in time and turnaround measures taken then bankruptcy is likely. The costs of bankruptcy are enormous
and affect all stakeholders of the company (Altman, 1984; Andrade & Kaplan, 1998; Altman & Hotchkiss, 2006;
Natalia, 2007; Opler & Titman, 1994).
Therefore, the academic researchers propose several approach to predict failure such as financial statement
analysis which is the easiest and best tool to evaluate companies performance, ratio analysis, z-score model, but
the problem still which model is the best to take the appropriate action (Aziz & Dar, 2006).
Levratto (2013) reveals that the circumstances of the business (internal and external) have a significant impact
upon business failure. Financial failure it happens when companies fall to pay its obligations or the fair
assessment of assets fall shorter than obligations (Ijaz et al., 2013).
Altman (1968) developed model for bankruptcy prediction called Altman Z-score model, also called multiple
discriminant analysis model (MDA), Altman defined Z-score model as a statistical measure to predict company
financial failure, Altman also defined the Z-score model as a linear combination of four or five common
financial ratios, weighted by coefficients, Altman was the first one uses Multiple Discriminant Analysis (MDA)
to develop a prediction model with a high degree of accuracy, the MDA technique and in particular the z- score
model has been applied in several financial distress and bankruptcy studies with satisfactory results (Aziz & Dar,
2006; Bellovary, Giacomino, & Akers, 2007; Platt & Platt, 2006; Zmijewski, 1984). Later, in 1983 Altman
developed the original model and finally established two models: Model A Z-score for manufacturing companies
closed, and Model B Z-score for non-manufacturing companies (Altman, 2000).
Many authors have pointed out that the failure of a set of definitions: the inability of the company to pay their

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obligations, and some went to the cessation of trade and loss of creditors. (Ismail, 2014; Ashour & El-farra, 2002)
indicated that financial failure that the company is unable to meet the financial obligations it has incurred and is
therefore in the process of bankruptcy. Although, (John, 1993) said that a firm is in financial distress when the
liquid assets are not sufficient to meet the current requirements of its hard contracts.
The study derives its value from being the first study Applied Z-score model on Jordanian insurance companies
sector according to the researcher Knowledge. In addition, the fact that the insurance sector is considered one of
the important components in the economies of developing and developed countries, which contributes to
important percentages in GDP and employment. This sector has become an important sector for study after the
huge losses it has suffered, which in the past decade have exceeded 120 million Jordanian dinars (Mahmoud,
2013). The importance of the study in trying to identify the importance of the issue of financial failure of the
stakeholders and the mechanism they adopt to monitor the performance of companies on the one hand, and on
the other to recognize the importance of using financial models to predict the financial failure of companies a
year ago to be used as an early warning before the failure in the future.
The problem of the study lies in two dimensions: the first dimension involves the lack of conceptual and
analytical awareness among individuals regarding the analysis and forecasting of financial failure, and the
second dimension of the problem lies in the lack of financial ratios on which companies rely on predicting the
future to give misleading results that cannot be relied upon in decision making. This study aims to determine the
effectiveness of the Altman Z-score model to predict the financial failure of the Jordanian insurance companies
for the period 2011-2016. The main objective of this research was to verify the accuracy of the revised Altman
Z’-score model (1983) in order to determine whether it is an optimal model for predicting corporate failure using
recent data of Jordanian Insurance companies in the period 2011-2016.
The paper is organized as follows. Section 2 is the review of the literature which will discuss financial failure.
Section 3 introduce and discuss the research design and methodology employed in this study, the data collection
and sample of the study. Section 4 present the result of finding. Section 5 will summarize the conclusion of this
study.
2. Literature Review
In the late 1960s, several studies were developed a several models for failure prediction. Researchers have
examined some of these models in order to identify their ability to predict corporate failure. (e.g. Beaver, 1966;
Altman, 1968; Deakin, 1972; Kida, 1980; Ohlson, 1980; Taffler, 1983; Shirata, 1998; Mohammed et al., 2012).
Al-Rawi, Kiani, and Vedd (2008), by using the Altman z-score model analysis to predict a firm’s insolvency,
they have remarked that the firm has increased its debt consequently. facing bankruptcy in the near future.
Similarly, Pathan (2009) applied the z-score model for a sample of US bank holding companies over the period
1997-2004, he finds that small boards size and boards that are not controlled by the CEO lead to additional bank
risk. Also, Gerantonis et al. (2009) examined the ability of Altman’s Z-score model to predict failure before it
occurs, results of the study have proved that the Altman Z-score consider an accuracy way to predict corporate
failure, also the study show the ability of Z-score model to predict financial failure, at the first year was 66%,
and this percentage decreased to 52% at the second year, while, 39% at third year and down to the 20% at fourth
year prior bankruptcy. But, Hayes, Hodge, and Hughes (2010) had analyzed the construction of Z- score model
by applying it to a sample of 17 US firms from retail industry, the study revealed that, the model correctly
predicts bankruptcy at a level of 94%. However, Mamo (2011) applying Altman model (1968) for predicting
financial distress on 43 banks, the result was an accurate predictor on 8 out of 10 failed firms, 80% validity for
the model. However, by using a sample of non-failed firms majority of them proved the Edward Altman’s
financial prediction model to be 90% valid. Also, Li and Naiping (2011), find z-score for public companies is
higher than the registered companies, This means that the financial risk of private companies is significantly
higher than that of publicly listed companies, and the Z-score for individual companies is significantly lower
than of public companies. This means that the financial risks of individual companies are significantly higher
than public companies. And, Al-Khatib and Al-Bzour (2011) studied the effect of financial ratios on forecasting
corporate bankruptcy through the Altman and Kaida models for the period 1990-2006 and a sample of
companies in the services and industry sector. The results of the two models to find out which is more
appropriate to give early warning about bankruptcy, where the average model Altman 93.8% and Keda 69% and
found that Jordanian companies do not use these models in their financial analysis. Also, Alareeni and Branson
(2012) investigated the failure prediction for Jordanian industrial companies in order to define the accuracy of
Altman Z-score model before it occurs. The rate of identification accuracy of the Z-score was 73.40% at first
year, at the second year 74.46% and at the third year 70.21%. Furthermore, Mohamed (2013), used Altman

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Z-score multi discriminant analysis (MDA) model for prediction of bankruptcy of firms listed in the NSE
adopted. The result confirm that Altman Z-score (1993) was not sufficient to differentiate between failed firms
and non-failed firms as compared to that of Altman’s Z score of 1968. Because, Altman (1993) Z-score was
intended for manufacturing and retailing firms, Mohamed (2013) suggested that investors should pay attention to
liquidity and activity ratios. But Kariuki (2013) study the impact of financial distress on commercial banks
performance, he analyzed data by using regression model. The results reveals that most banks under study had
financial distress, non-listed banks suffered more. Financial distress had major impact on financial performance,
and there is a negative relationship between financial distress and financial performance. Finally, Gunathilaka
(2014) examined the financial distress of 82 companies listed on the Colombo Stock Exchange (CSE) from
several industries by using the Z-Score models of Altman and Springate. Samples were collected from 2008 to
2012 and analyzed by incorporating Multivariate Discriminant Analysis (MDA). The results of the study were
identical, though Altman’s Z-Score demonstrated a higher degree of accuracy in predicting the financial distress
of the selected Sri Lankan companies at least a year before the distress.
3. Methodology
The study depended on the analytical method through doing the statistical analysis of the independent variables
on the dependent variable related to the subject of the study in order to cover the analytical part of the study, in
addition to the descriptive method through relying on books, periodicals, previous studies and financial reports
of the companies of the study’ sample, whether the direct or the indirect ones, to cover the theoretical part.
3.1 Data Collection
Data have been collected from the company’s annual financial reports published in Amman Stock Exchange. The
sample consists of all insurance companies listed on Amman Stock Exchange (ASE) over the period 2011-2016.
In addition, companies with missing data have been removed from the initial sample. Thus, the final sample
consists of 21 ASE insurance listed companies.
3.2 The Model
The analytical model used in the study is Altman revised Z-score model (1983). It is a linear equation in the
form:
Z= 6.56X1+3.26X2+6.72X3+1.05X4
Where;
Z=overall index;
X1=Working Capital/Total Assets(WC/TA);
X2=Retained earnings /Total Assets (RE/TA);
X3=Earnings before Interest and Taxes/Total Assets (EBIT/TA);
X4=Market Value of Equity/Book Value of Total Liabilities (MC/TL).
Discrimination zones:
Z > 2.60, “Safe” zone, exemplifies that a firm will less likely go bankrupt.
1.10 < Z < 2.60, “Grey” zone, indicates that the firm is at the risk of financial distress (grey zone).
Z < 1.10, “Distress” zone, implies that the firm will very likely go bankrupt in the near future.
3.2.1 Dependent Variable
Z is the discriminant variable whose value will allocate a firm as either financially distressed or healthy.
3.2.2 Independent Variable
X1 = Working Capital/Total Assets (WC/TA)
Working Capital (WC): is simply defined as the difference between current assets and current liabilities and it
can either be positive or negative.
X2 = Retained Earnings/Total Assets (RE/TA)
Retained Earnings (RE): are earnings not distributed to shareholders, instead reinvested in the firm. The RE to
TA ratio measures the degree of financing of total assets via surplus profits. It also measures the degree of
leverage of a company. The ratio measures cumulative profitability of a firm and indicates the firm’s earning
power as well as age (Altman, 2000).

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X3 = Earnings Before Interest and Taxes/Total Assets (EBIT/TA)

Earnings Before Interest and Taxes (EBIT): refer to the earnings generated from the operating activities of the
firm. The ratio EBIT/TA measures the efficiency of assets in generating profits. Low EBIT/TA ratio indicates
that the firm is not using the assets efficiently in generating profits. This ratio estimates the cash supply available
for allocation to the creditors, government and shareholders. This ratio is believed to be extremely appropriate
for investigating firm bankruptcy because the ultimate existence of the company depends on earning power
(Altman, 1968).
X4 = Market Capitalization/Book Value of Total Liabilities (MC/TL)
Liabilities is the measuring of both the long and current term, while equity is found to be the market value of all
the shares of common, preferred and stock. This measure demonstrates how much the firm’s assets might decline
in value before the assets become lower than liabilities and the company becomes bankrupt (Altman, 2000).
4. Results and Discussions
4.1 Descriptive Analysis
The descriptive variables of the study’s variables were calculated as in table (1), where the arithmetic mean and
the standard deviation of each of the (X1, X2, X3, X4) were calculated.

Table 1. Descriptive analysis of the study’s variables

X1 X2 X3 X4 Z
Maximum 1.298485 0.107281 0.123711 2.228598 10.34633
Minimum -0.948374 -0.983549 -0.501184 0.170101 -11.66851
Median 0.351214 -0.018408 0.027206 0.567957 2.961056
Std. Dev. 0.445768 0.200577 0.077743 0.388055 3.858047
Skewness -0.121171 -2.295403 -3.182951 1.631977 -0.533187
Kurtosis 3.097175 8.354581 17.76714 6.189481 3.988109
Jarque-Bera 0.357909 261.1720 1357.613 109.3375 11.09595
X1:WC/TA; X2:RE/TA; X3:EBIT/TA; X4:MC/TL.

Through the Table 1, you can see that the arithmetic mean of the independent variables of the study, represented
in Working Capital/Total Assets, Retained Earnings/Total Assets, Earnings Before Interest and Taxes/Total
Assets, Market Capitalization/Book Value of Total Liabilities, amounted respectively (0.351214, -0.018408,
0.027206, 0.567957) respectively, and with a standard deviation that amounted respectively (0.445768, 0.200577,
0.077743, 0.388055) respectively. The dependent variable of the study, represented in the Z of the study’ sample,
has amounted on the arithmetic mean (2.961056) and on the standard deviation it reached (3.858047). This
indicates that there are differences in the profitability of the insurance companies due to the performance of these
companies from one year to another on one hand, and the differences between the size and the structure of the
company on the other hand.

Table 2. Pearson correlation matrix

X1 X2 X3 X4 Z
X1 1
X2 0.653464 1
X3 0.365882 0.566192 1
X4 0.529037 0.268929 0.152477 1
Z 0.973963 0.769602 0.524657 0.572759 1
X1:WC/TA; X2:RE/TA; X3:EBIT/TA; X4:MC/TL.

The correlations of the variables of the model were calculated and the results are as shown in table (1) above.
The findings in table (1) indicates that there is a strong positive correlation between Z values and Working
capital/Total asset (r=0.97). And there is a strong positive correlation between Z values and Retained
Earnings/Total Assets (r=0.76). And there is a strong positive correlation between Z values and Earnings Before
Interest and Taxes/Total Assets (r=0.52).And there is a strong positive correlation between Z values and Market
Capitalization/Book Value of Total Liabilities (r=0.57).

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4.2 Discussion Result

Table 3. Financial ratio analysis

Middle East Insurance (MEIN)
year X1 X2 X3 X4 Revised Z Zone
2011 1.292386 0.068597 0.002195 0.934641 9.6977998 Safe
2012 1.162655 0.054891 0.021655 0.713865 8.7010432 Safe
2013 1.0909 0.051389 0.041161 0.55593 8.1841605 Safe
2014 1.025769 0.059067 0.031472 0.667425 7.8338919 Safe
2015 0.962107 0.068936 0.029283 0.658438 7.4242926 Safe
2016 0.935837 0.107281 0.068041 0.775897 7.7607532 Safe
Al-Nisr Al-Arabi Insurance
year X1 X2 X3 X4 Revised Z Zone
2011 0.832232 0.018689 0.02575 1.227289 6.9820547 Safe
2012 0.69171 0.015922 0.037268 1.171594 6.0701403 Safe
2013 0.539919 0.009628 0.037964 0.972702 4.8497168 Safe
2014 0.473238 0.017666 0.04678 1.000292 4.5266961 Safe
2015 0.422858 0.018414 0.047706 0.842876 4.039579 Safe
2016 0.354595 0.011189 0.041949 0.778419 3.4618546 Safe
Jordan Insurance
year X1 X2 X3 X4 Revised Z Zone
2011 0.959164 0.023268 0.039614 2.01784 8.752909 Safe
2012 1.020655 0.043419 0.057272 1.926394 9.2446251 Safe
2013 0.931684 0.025661 0.008446 1.737974 8.0771342 Safe
2014 0.822395 0.044766 0.056881 1.599698 7.6027675 Safe
2015 0.591725 0.048744 0.013104 1.49037 5.6935703 Safe
2016 0.559976 0.038226 0.030655 1.273635 5.3413733 Safe
Arabia Insurance Company-Jordan
year X1 X2 X3 X4 Revised Z Zone
2011 0.525599 0.034835 0.001162 0.477334 4.0705006 Safe
2012 0.400872 0.033038 0.026595 0.294043 3.2248882 Safe
2013 0.388551 0.032425 0.024488 0.27409 3.1069558 Safe
2014 0.364829 0.033775 0.036033 0.408859 3.1748259 Safe
2015 0.326689 0.037214 0.003765 0.37021 2.6784186 Safe
2016 0.347833 0.030396 0.027817 0.355126 2.9406887 Safe
Delta Insurance
year X1 X2 X3 X4 Revised Z Zone
2011 0.94172 0.021459 0.003794 2.228598 8.6131674 Safe
2012 0.923736 0.029002 0.066096 0.792084 7.4301083 Safe
2013 0.70694 0.017414 0.052777 0.630062 5.7105202 Safe
2014 0.6619 0.014155 0.057363 0.516377 5.315888 Safe
2015 0.572988 0.018195 0.030957 0.478299 4.5283645 Safe
2016 0.555776 0.018419 0.035702 0.594907 4.5705092 Safe
Jerusalem Insurance
year X1 X2 X3 X4 Revised Z Zone
2011 0.843862 0.016628 0.052407 1.336156 7.3450792 Safe
2012 0.793055 0.021953 0.067423 1.175113 6.9609578 Safe
2013 0.684793 0.025884 0.063 0.964418 6.0126202 Safe
2014 0.682944 0.033618 0.071174 0.874199 5.9859097 Safe
2015 0.675297 0.037287 0.042801 0.838782 5.7198479 Safe
2016 0.593267 0.030169 0.018717 0.640639 4.7886308 Safe
National Insurance
year X1 X2 X3 X4 Revised Z Zone
2011 0.591483 -0.14155 -0.04534 0.965968 4.1282701 Safe
2012 0.521744 -0.11988 0.012431 0.970482 4.1343635 Safe
2013 0.384585 -0.06916 0.024241 0.695341 3.1904236 Safe
2014 0.464515 -0.0143 0.063833 0.553456 4.0106973 Safe
2015 0.534508 0.006741 0.068029 0.588127 4.6030376 Safe
2016 0.585722 0.024456 0.073072 0.618718 5.0627617 Safe

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Jordan International Insurance

year X1 X2 X3 X4 Revised Z Zone
2011 1.115113 -0.01136 -0.02974 0.748442 7.8641148 Safe
2012 1.053183 -0.0308 -0.00721 0.581214 7.3702948 Safe
2013 1.224277 -0.00786 0.019898 0.635606 8.8067415 Safe
2014 1.298485 0.024084 0.036382 1.206427 10.107813 Safe
2015 1.284944 0.032777 0.046764 1.424749 10.346327 Safe
2016 1.118745 0.024704 0.025396 0.927739 8.56429 Safe
Arab Orient Insurance Company
year X1 X2 X3 X4 Revised Z Zone
2011 0.228533 0.019493 0.069824 0.81329 2.8858935 Safe
2012 0.211264 0.020391 0.062998 0.597935 2.5035461 Safe
2013 0.237229 0.026137 0.064654 0.565643 2.6698259 Safe
2014 0.296774 0.047094 0.068105 0.621857 3.2109761 Safe
2015 0.282523 0.064266 0.055311 0.550389 3.0124595 Safe
2016 0.270063 0.069579 0.013404 0.517072 2.6314423 Safe
The United Insurance
year X1 X2 X3 X4 Revised Z Zone
2011 0.836295 0.039045 0.016735 0.713756 6.4752825 Safe
2012 0.441116 0.018798 0.031028 0.464411 3.6511377 Safe
2013 0.175184 0.013554 0.046119 0.902781 2.4512314 Grey
2014 0.049944 0.046231 0.053136 0.483117 1.3426938 Grey
2015 0.277096 0.042011 0.050887 0.494414 2.8158002 Safe
2016 0.254201 0.059622 0.061184 0.604321 2.9076208 Safe
Arab Life & Accident Insurance
year X1 X2 X3 X4 Revised Z Zone
2011 0.54107 -0.01277 -0.00917 0.442096 3.9103385 Safe
2012 0.508188 -0.02252 -0.00785 0.361101 3.586725 Safe
2013 0.380599 -0.04163 -0.01553 0.278871 2.5494957 Grey
2014 0.375197 -0.00819 0.038665 0.27333 2.9814236 Safe
2015 0.408389 -0.00926 0.028207 0.348538 3.2043566 Safe
2016 0.358394 0.009084 0.034931 0.666843 3.3155991 Safe
Philadelphia Insurance
year X1 X2 X3 X4 Revised Z Zone
2011 0.660645 -0.04069 -0.01459 0.681725 4.8189757 Safe
2012 0.498599 -0.08087 -0.04485 0.550911 3.2842531 Safe
2013 0.376165 -0.12722 -0.0431 0.446756 2.2323462 Grey
2014 0.555989 -0.07079 0.078901 0.516451 4.4890201 Safe
2015 0.622625 -0.05045 0.038274 0.598723 4.8058045 Safe
2016 0.74922 -0.03428 0.035243 0.655389 5.728114 Safe
Jordan French Insurance
year X1 X2 X3 X4 Revised Z Zone
2011 -0.02248 -0.26263 -0.05024 0.268809 -1.0589612 Distress
2012 -0.05057 -0.27393 -0.02162 0.193617 -1.1667265 Distress
2013 0.013885 -0.2167 -0.00492 0.170101 -0.4697963 Distress
2014 0.014809 -0.1477 0.048717 0.182474 0.1346336 Distress
2015 0.083953 -0.09098 0.069221 0.215696 0.9457768 Distress
2016 0.137561 -0.03723 0.068683 0.308134 1.5661097 Grey
The Holy Land Insurance
year X1 X2 X3 X4 Revised Z Zone
2011 0.341049 -0.27229 -0.03794 0.948806 2.0909277 Grey
2012 -0.94837 -0.73256 -0.50118 0.294207 -11.66851 Distress
2013 -0.6866 -0.67908 0.068335 0.255178 -5.9907396 Distress
2014 -0.72142 -0.72906 0.015001 0.349386 -6.6415596 Distress
2015 -0.76556 -0.98355 -0.18354 0.546556 -8.8879799 Distress
2016 -0.35408 -0.71294 0.123711 0.922475 -2.8469717 Distress

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Al-Manara Insurance [Link].

year X1 X2 X3 X4 Revised Z Zone
2011 0.555962 -0.48796 -0.16438 0.806827 1.7989068 Grey
2012 0.193261 -0.71591 -0.23757 0.433265 -2.207618 Distress
2013 0.151112 -0.78096 -0.01653 0.18574 -1.4706751 Distress
2014 0.099031 -0.02707 -0.0253 0.21677 0.6189934 Distress
2015 0.162772 -0.04457 -0.01215 0.221236 1.0731058 Distress
2016 0.233813 -0.05131 0.013852 0.207924 1.6779624 Grey
Jordan Emirates Insurance Company P.S.C
year X1 X2 X3 X4 Revised Z Zone
2011 -0.13768 -0.21998 -0.27153 0.451887 -2.970564 Distress
2012 -0.11064 -0.16639 0.02388 0.305942 -0.7865152 Distress
2013 -0.11883 -0.19341 -0.02015 0.418137 -1.1064193 Distress
2014 0.363598 -0.16552 0.058516 0.473354 2.735864 Safe
2015 0.103511 -0.33767 -0.14525 0.397862 -0.9800829 Distress
2016 -0.04939 -0.22845 -0.05767 0.321429 -1.1188109 Distress
Arab Union International Insurance
year X1 X2 X3 X4 Revised Z Zone
2011 0.273956 -0.12589 -0.13785 0.921198 1.4276835 Grey
2012 0.098771 -0.21625 -0.1141 0.401784 -0.4019154 Distress
2013 0.029421 -0.31533 -0.08362 0.521689 -0.8491446 Distress
2014 0.086759 -0.28642 0.007741 0.759231 0.4846076 Distress
2015 0.007479 -0.30762 -0.04154 0.643239 -0.5575085 Distress
2016 0.052984 -0.10282 -0.03802 0.377901 0.1537101 Distress
Euro Arab Insurance Group
year X1 X2 X3 X4 Revised Z Zone
2011 0.233535 -0.17278 -0.16949 0.617941 0.4785824 Distress
2012 0.111653 -0.1357 0.03075 0.412724 0.9300558 Distress
2013 0.208032 -0.06777 0.040473 0.57027 2.0145304 Grey
2014 0.309336 0.001332 0.087392 0.686047 3.3412098 Safe
2015 0.347625 0.023329 0.034367 0.59996 3.2173737 Safe
2016 0.389647 0.025079 0.035904 0.481527 3.3847262 Safe
The Arab Assurers Insurance Company
year X1 X2 X3 X4 Revised Z Zone
2011 -0.12585 -0.1583 0.060398 0.296944 -0.6239831 Distress
2012 0.068946 -0.12028 0.000601 0.220382 0.2956032 Distress
2013 0.007356 -0.11584 -0.00524 0.271179 -0.079838 Distress
2014 0.055604 -0.12674 -0.0034 0.25489 0.1963559 Distress
2015 0.161637 -0.08332 0.031098 0.276578 1.2881004 Grey
2016 0.254763 -0.05051 0.038197 0.196369 1.9694686 Grey
Arab Jordanian Insurance Group
year X1 X2 X3 X4 Revised Z Zone
2011 -0.25878 -0.41022 -0.07717 0.37381 -3.1610052 Distress
2012 -0.3651 -0.47571 -0.07081 0.557494 -3.8363156 Distress
2013 -0.34957 -0.2299 -0.0127 0.630039 -2.4664681 Distress
2014 -0.11588 -0.095 0.039139 0.357218 -0.4317617 Distress
2015 -0.19193 -0.07264 0.028611 0.40428 -0.8791443 Distress
2016 -0.11314 -0.03533 0.042566 0.430519 -0.1192963 Distress
The Mediterranean & Gulf Insurance Company-Jordan P.L.C
year X1 X2 X3 X4 Revised Z Zone
2011 -0.06006 -0.14007 -0.09692 1.274334 -0.1639093 Distress
2012 -0.11978 -0.11719 0.003886 1.025987 -0.0643937 Distress
2013 -0.21876 -0.09766 0.008739 0.579412 -1.0863333 Distress
2014 -0.32023 -0.11876 -0.02637 0.400431 -2.2446137 Distress
2015 -0.2736 -0.11936 0.011688 0.576791 -1.4997769 Distress
2016 -0.26226 -0.09408 0.022149 0.485115 -1.3688967 Distress

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Table 3 shows that the percentage of companies with high Z value (Safety zone) reached 57.13%, this indicates
the safety of the financial position of these companies, because they develop their activities and good use
company funds, which it is noted by rising TA, decreased TL & WC. While the percentage of companies with a
low Z value near zero (Gray and Distress zone) reached 38.09%, that companies are exposed to risk of financial
failure, may be due to lack of experience in the management of funds and they did not develop their activities
and misuse company funds, where it is noted that the rise in assets offset by a rise in liabilities, resulting in a
decline in profits. so that gives an indicators the companies will exposed to financial failure if they stay use the
same financial polices they currently use. Study results compatible with Al-Rawi, Kiani, and Vedd (2008),
Gunathilaka (2014), Gerantonis et al. (2009), Alareeni and Branson (2012).
5. Conclusions
The Z-score model is a very practical tool that can be used to predict the insolvency of companies as well as
maintaining and monitoring of companies being risk managed. Company liquidations are a daily occurrence and
more often than not, credit granters lose out. The Altman prediction models can effectively be used to breach that
gap in the credit industry. Furthermore, this tool could be used by investors when considering investing in a
private company to ascertain the state of the company’s financial position.
The Z score Altman’s model may not be the only model to measure the financial distressed firms and the
researcher recommends use of other models to determine the financial distressed firms. This may even expand
the number of distressed firms in a given Securities Exchange.
This study highly recommends to the potential investors in companies to use the Altman failure prediction model
as an assessment tool. The results could raise certain questions about the state of a company and could ultimately
result in an investor investing or purchasing a company that is profitable and well managed since declining
Z-score values depicts a failing company.
The study recommends that the Altman failure prediction model should use the prevailing Economic conditions
such as changes in the economy, markets and industries in the economy in order to predict a true picture of the
company in the economy.
Further research should be undertaken in the field Logit failure prediction models to forecast the success or
failure of the company and give a comparison to the Altman failure prediction model used to simply its usage
and encourage their use by industry professionals.
Many other factors may have influenced the performance of firms, factors that cannot be measured or quantified
e.g staff morale, boardroom wrangles, and occupational health etc. It would be interesting if a similar study was
conducted in concomitance with this to ascertain the findings. This would expand the scope of the literature on
firm performance.
Further exploration of Altman’s Z score, and alternative formulas, is necessary to refine this potentially useful
tool in order to develop a collection of tools useful in predicting financial distress.
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