Validity of altman’s z-score model in predicting financial distress of listed companies at the Nairobi securities exchange

Abstract

Financial distress prediction has been of concern to management and other stakeholders since the 2008 financial crisis. The impact of financial distress and bankruptcy on firms cannot be taken for granted. Financial distress is detrimental to big organizations and the small organizations alike. This study was conducted with the objective of Altman’s failure prediction model in predicting financial distress of listed firms at the Nairobi Securities exchange for the period 2010 to 2014. Data was extracted from secondary sources for a period of five years. Data extracted included working capital, total assets, retained earnings, market capitalization total liabilities and sales. The collected data was then analyzed using SPSS version 20 and Microsoft excel software. In the analysis Multivariate Discriminant Statistical technique as used by Altman 1968 was adopted. Firms that were found to be distressed were Express Kenya, Kengen, Marshalls East Africa, Transcentury, Sasini, Olympia and Kenya Power and Lighting Company Ltd. The study established that the Altman’s Z-score model was appropriate for predicting financial distress of listed firms at the NSE. The study recommends the adoption of Altman’s failure prediction model in predicting financial distress of listed firms by not only investors but also all other stakeholders.