A revision of Altman’s Z- Score for SMEs: suggestions from the Italian Bankruptcy Law and pandemic perspectives

Abstract

As the pandemic urged further investigations on the prediction of firms’ financial distress, this study develops and tests an alternative measure to the alert system elaborated by the NCCAAE which combines the benefits of the Z-score’s multivariate discriminant model with the background employed to develop the NCCAAE’ predictors. Using a sample of 43 viable and 43 non-viable Italian SMEs, we first compare the financial distress predictive accuracy of the NCCAAE’s alert system to that of the traditional Z-score over the period 2015-2019. On the basis of the results, we elaborate and compare the revised versions of both approaches which align the traditional Z-score to the current socio-economic conditions and provide an alternative measure to the NCCAAE’s alert system which embeds a Z-score calculated using the ratios elaborated by the NCCAAE for the alert system. The analysis of the two baseline approaches showed complementary results as the Z-score overperformed the alert system when predicting the status of non-viable firms whereas the opposite emerged as regards viable firms. The revised version of both approaches pointed out an enhanced predictive accuracy with respect to baseline models. In particular, the complementary role of the Z-score has been integrated into the new alert system as major contribute to its enhancement which pointed it out as the best measure employed. We, therefore, contribute to the literature studying the financial distress prediction developments by elaborating an alternative measure to the alert system developed by the NCCAAE which combines the benefits of the Z-score’s multivariate discriminant function with the background employed to develop the NCCAAE’ predictors. Our analysis enriches the post-pandemic debate on refined financial distressed prediction methods by pointing out the limits of the alert system as designed by the NCCAAE and suggests an alternative and better performing measure that may be used by third-party bodies to predict financial distress