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An International Meeting of American Accounting
Association
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Twenty-five Years of Z-scores in the UK: Do They Really Work? |
Vineet Agarwal
Cranfield School of Management
Richard Taffler
Edinburgh University
Abstract: Although copious statistical failure prediction models are described in the literature, appropriate tests of whether such methodologies really work in practice are lacking. Validation exercises conducted are, at best, only ex post with clear confusion demonstrated between true ex ante predictive ability and ex post sample classification. This paper describes the operating characteristics of a well known UK-based z-score model and evaluates its performance over the twenty-five year period since it was originally developed. The model is shown to have true ex ante predictive ability over this extended time period and dominates more naïve prediction approaches. However, its performance is attenuated in the most recent period. Prima facie, such results also demonstrate the predictive ability of the published accounting numbers used in the z-score model calculation.