Models for Predicting Corporate Failure

Strengths and Weaknesses of Quantitative and Qualitative Models of predicting corporate failure


Quantitative models such as the Z score

Strengths
 use publicly available financial data to predict whether a firm is likely to fail.

 Calculation is easy to make using the model


Weaknesses

 the calculation is only a probability not an absolute likelihood so it may need to be used with other data to make a more rounded assessment.

 the model is based on historical trading patterns of a specific group of companies so a change in trading pattern or a company that falls outside the industry grouping used may find the model inaccurate.

 companies in trouble may use creative accounting in calculating figures which means where these go into calculations they are unreliable.




Qualitative models such as Argenti A score

Rely on subjective scores to certain questions given by the investigator. A score above a certain level indicates potential disaste. The models attempt to fill in the gaps that quantitative models leave by using in-depth questionnaires but again these have their flaws. For isntance Argenti A scores uses fairly subjective categories to calculate on overall score. These are wide ranging but can be answered subjectively and be open to bias.



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