The accuracy of Altman’s models in predicting hotel bankruptcy

Mihail N Diakomihalis

Abstract


This paper studies the bankruptcy predictions for different hotel categories in Greece, aiming to determine the zone of discrimination classified as “certainty” for bankruptcy. It also calculates the differentiation degree of the bankruptcy risk that is owed to the different categorisation of the hotels. The three versions of Altman’s model have been applied to evaluate the bankruptcy prediction and its accuracy between the hotel enterprises that fall in the “distress” zone. Approximately 40 percent of the total firms in the distress zone are evaluated, having a Z 1 score below 1.8, while the percentage for the Z 2 formula is 44.5 percent and 36.3 percent for the Z 3 score. The Z 1 score formula is more precise—with an accuracy rate of 88.2 percent in 2007, one year before bankruptcy—than the Z2 model, which gives a prediction of  83.33 percent for the cutoff zone <0.7, while the Z 3 score reaches 80 percent prediction for the < 0.5 zone. Five and four star hotels show a higher bankruptcy risk than 4-star hotels, while the smaller risk is depicted in 2-star hotels. This paper fulfils the identified need to predict the certainty of bankruptcy among enterprises in the distress zone.


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DOI: http://dx.doi.org/10.5296/ijafr.v2i2.2367

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