A comparative analysis of the application of Altman (1968) Z-score and Ohlson (1980) O-score predcition models to Hong Kong public listed companies, and the impact of cash conversion cycle and non-financial variables on predicting business failure
thesisposted on 28.03.2022, 12:47 by Kam-Wing Lau
The bankruptcy prediction models most frequently used in empirical research of business failure are the Altman (1968) and Ohlson (1980) models. The predictive accuracy of both models, developed using US data, has been repeatedly tested and compared using data of different countries. However, no published studies have compared these models using Hong Kong data, nor have they explored how cash conversion cycle and HIBOR rate are connected with business failure, despite evidence that liquidity and non-financial variables affect failure prediction. This study examined the applicability of the Altman (1968) and Ohlson (1980) models in predicting business failure using data from Hong Kong public listed companies. It also tested whether adjusting the cutoff points (points determined by scorings that classified companies as failed or non-failed) improved the models’ accuracy, and compared the accuracy of the two models. Finally, it examined the effects of cash conversion cycle and some non-financial variables including change of auditor and change of HIBOR interest rate, on predicting business failure. The sample comprised 234 Hong Kong public-listed companies: 39 failed companies that had been delisted from the Hong Kong Stock Exchange between 1998 and 2011, and 195 non-failed public listed companies that were not delisted during the same time period. Financial data were obtained from the Standard and Poor (S&P) Capital IQ and the Hong Kong Stock Exchange (HKEx) database. Both the Altman and Ohlson models achieved an overall predictive accuracy significantly greater than 50 per cent of the total sample for each of the three years prior to delisting. The Ohlson (1980) model was relatively superior to the Altman model in making overall correct classifications of the non-failed companies publicly listed in the HKEx. This study is the first to find that cash conversion cycle and HIBOR interest rate are significantly correlated to business failure when data of Hong Kong public-listed companies are applied.