Default Prediction Model for SME’s: Evidence from UK Market Using Financial Ratios

Abstract

The paper discusses bankruptcy prediction model in the UK during the two last decades. My study is provided to support that the Original Altman's Z-score (1968) might not valid to predict bankruptcy since the business environment changed a lot. However, there are many firms go to bankrupt recently and there is a need to study and improve the bankruptcy predictive ability. And the result shows that Altman's Z-score has little predictive ability in bankruptcy prediction. Then, I use the recent data to renew the Z-score model by changing the coefficient of original Z-score. After compared to the original Altman's Z-score model, I found that the renewed Z-score model has been improve to a reasonable accuracy rate. In addition, I found that the variable (Sales/ total assets) has little contribution to distinguishing the bankrupt and non-bankrupt firms.