This paper discusses the discriminating power of a prominent credit scoring technique, Altman’s Z-Score model, in predicting corporate financial distress in Sri Lanka. The study examines a sample of 67 firms including 16 exposed-to-distress firms, in Colombo Stock Exchange over the period from 2008 to 2012. It analyses company financial information using Altman’s Z Scores, Independent Sample t tests and Multiple Discriminant Analysis. The results are consistent with prior findings in Sri Lanka, that Altman’s Z model shows a higher degree of discriminant power in identifying financially distressed firms, at least one year prior to distress. The market value and book value contributes similarly between Altman’s Z models. The study indicates the efficiency of the Z models in distress predictions and the level of care required in solvency based decisions.
Keywords: Corporate, Distress, Altman, Sri Lanka.
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Lecturer, Department of Finance Faculty of Management Studies & Commerce University of Sri Jayewardenepura Nugegoda