Due to the increase in corporate bankruptcy, financial distress studies have flourished since 1968. Firms do find themselves in financially distressful situations because of several factors including changing economic environment such as a decrease in aggregate demand, an increase in the cost of borrowed funds, and changes in government regulation. In addition to the Altman's z-score model, the sustainable growth rate (SGR) is another tool that is used primarily for financial planning. The problem with Altman's z-score model is that it does not consider whether a firm can be financially distressed or not if the sustainable growth rate of the firm is in fact higher than the growth rate of the firm's reported revenues. The purpose of this quantitative study was to investigate the efficacy of using ltman's z-score in forecasting financial distress of a firm when the sustainable growth rate was higher than the growth rate of the reported revenues. The sample for this study was drawn from all non-financial firms traded on the NYSE. The research question was investigated using two group design in two phases. Phase 1 involved the calculation of the sustainable growth rate (SGR), the growth rate of reported revenues, and the calculation of Altman's z-score. The Altman's z-score of the two groups were compared using Mann-Whitney U test to determine whether a statistically significant difference exists in the z-score. Phase 2 involved the correlation between the values of SGR and the values of Altman's z-score to determine if there was a statistically significant relationship between the two scores. The result of this research indicates that the Alman's z-score and the sustainable growth rate are conceptually independent and both can be used to ascertain whether a firm is financially distressed or not. In addition, result of this study provide practical application that could help management of firms reach important financial and managerial decisions. While the result of this study provided useful information and added to existing knowledge on financial distress, additional research using more than one year of financial data is recommended in order to confirm the results of this study.
|Department:||School of Business and Technology Management|
|School Location:||United States -- Arizona|
|Source:||DAI-A 76/05(E), Dissertation Abstracts International|
|Subjects:||Accounting, Finance, Economic theory|
|Keywords:||Altman's Z-score, Bankruptcy, Financial distress, Sustainable growth rate|
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