Using Altman’s Z-Score Model to Predict Corporate Failure: The Case of Iraqi Private Companies

Abstract

This study examines the validity of Altman’s Z-score model to predict corporate failure in the case of 10 Iraqi private companies between 2007 and 2016, using the Generalised Method of Moments system. The results show that the lagged Z-score has an insignificant negative effect on the contemporaneous firm Z-score. However, working capital to total assets (X1), retained earnings to total assets (X2), profit before interest and tax to total assets (X3), book value of equity to total liabilities (X4) and sales to total assets (X5) have a positive effect on a firm’s Z-score. X1 and X4 are significant at 1%, X3 and X5 are significant at 5% and X2 is insignificant in determining the corporate failure in Iraqi private companies. This study therefore suggests, among many other recommendations, that Iraqi firms should apply financial analysis models to evaluate the results of their work in the event of corporate failure. The results of this research clearly show that this is likely to be important for these companies and for their shareholders and other individuals, such as investors.