EVALUATION OF APPLICABILITY OF ALTMAN'S REVISED MODEL IN PREDICTION OF FINANCIAL DISTRESS

Abstract

This study assesses whether Edward Altman’s financial distress prediction model can be useful in predicting business failure in Kenyan. The population of this study is composed of all the companies listed in the Nairobi Stock exchange 1989 to 2008. Twenty firms are select ed for the study: 10 firms that continue to be listed and 10 firms that were delisted in Nairobi stock exchange during period 1989 to 2008. The source of Secondary data is obtained from financial reports of these listed and delisted compani es at the Nairobi Stock Exchange and the Capital Markets Authority. This research study reveals that Edward Altman’s financial distress prediction model is found to be applicable in 8 out of the 10 failed firms that were analyzed, which indicates a 80% success ful predi ction of the model. On the 10 non-failed firms analyzed, 9 of them proved that Edward Altman’s financial distress prediction model was success ful indicating a 90% validity of the model. The study concludes that Edward Altman model of predicting financial failure of compani es is a useful tool for investors in the Kenyan market