Using Altman's Z-Score Model in Predicting Corporate Failure of Financially Distressed Companies in Nairobi Securities Exchange

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dc.contributor.author Githinji, Christine
dc.date.accessioned 2018-10-12T09:55:52Z
dc.date.available 2018-10-12T09:55:52Z
dc.date.issued 2018
dc.identifier.uri http://erepo.usiu.ac.ke/11732/4039
dc.description A Research Project Report Presented in Partial Fulfilment of the Requirements of the Degree of Masters in Business Administration (MBA) en_US
dc.description.abstract The general purpose of the study was to use Altman's Z-score model in predicting corporate failure of financially distressed companies in Nairobi Securities Exchange. The researcher used the following research questions to guide the study to its completion: What are the determinants of financial distress for companies in the NSE as predicted by the Altman Z-score model? What are the implications of the financial distress on the predictive ability of the Z-Score models? Which companies in the commercial and services sector were most affected by financial distress? The study adopted multivariate descriptive analysis to assess financial distress of firms in the commercial and services companies listed at the Nairobi Securities Exchange with the aim of determining whether the firms in this sector were likely to go bankrupt according to their financial statements. The researcher obtained secondary data from financial reports of the listed companies at the Nairobi Stock Exchange and the NSE handbook on company’s returns from 2012-2016 financial years. The secondary data was in form of current assets and liabilities, total assets, retained earnings, earnings before interest and taxes, book value of equity, and sales. The researcher will also review the Chairman’s statement from various annuals reports to collect relevant data. From the initial target population of all the 33 firms listed in the NSE, the researcher used a sample of 11 firms listed under the commercial and service sector for the analysis. The first research question revealed that financially distressed companies constantly use financial leverage to reinstate their financial position; however, it usually leads to underperformance and decrease in market value if not well managed. The second research question established that the predictive ability of Altman’s Z”-score model is accurate when determining whether a firm is distressed or not. The third research question established that Uchumi Supermarket Ltd and Kenya Airways Ltd were the two companies that experience the worst financial distress in the commercial and services sector at the NSE. The study concluded that Altman’s Z score is a reliable model that companies can use to predict their likelihood of going bankrupt. Secondly, the study concluded that the decline of the financial performance of firms listed in the NSE result from poor management, high debts, intense competition, and unfavourable contracts. The study also strongly confirm that with wide-ranging secondary data available on financial distress, researchers find it difficult to estimate the real effects of financial distress on a company’s market value. Lastly, a number of both direct and indirect costs lead to financial distress; however, one cannot explicitly isolate financial distress from various unforeseen and negative market shocks. The study recommends that CMA should conduct a comprehensive investigation and overhaul of all firms that have shown signs of financially distress with the aim of determining the exact root cause of financial distress by identifying the risk factors, and implementing sustainable solutions. Furthermore, if an NSE-listed company is found to cooks its books in future, it goes a long way to hold the management, board of directors, auditors as well as their respective lawyers responsible for the losses incurred by the shareholders. Lastly, this study recommends that CMA should exercise their mandate to ban all financial advisers of firms that go through prolonged financial distress and corporate bankruptcy due to mismanagement of funds. A suggestion for further research would be the role of ICPAK and CMA in regulating financial reporting as more companies have manipulated books. Finally, as a way of complementing the study results, the researcher recommends that it is important to carry out a review of the effects of financial distress on private firms and comparing it to publicly traded firms in the NSE. en_US
dc.language.iso en en_US
dc.publisher United States International University - Africa en_US
dc.subject Altman's Z-Score Model en_US
dc.subject Corporate Failure en_US
dc.subject Financially Distressed Companies en_US
dc.subject Nairobi Securities Exchange en_US
dc.title Using Altman's Z-Score Model in Predicting Corporate Failure of Financially Distressed Companies in Nairobi Securities Exchange en_US
dc.type Thesis en_US

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