Predicting Corporate Failure : Some Empirical Evidence from the UK

Purpose – The purpose of this paper is to use relevant financial information of private medium-sized failed and non-failed manufacturing firms in the UK, during the period 1994-2004 to determine whether corporate failure can be predicted by developing a Z-score model.Design/methodology/approach – Multiple discriminant analysis is used to develop the Z-score to support the notion that Z-score is an innovation to overcome the numerous difficulties associated with using single ratios to measure companies' health or risk of failure.Findings – This paper advances the notion that the net profit margin is superior to the gross profit margin in discriminating between failed and non-failed UK manufacturing companies in terms of its significant contribution to the Z-score, though the latter exceeds the former slightly using the univariate analysis.Originality/value – This research contributes to the area of benchmarking by providing a method to more accurately predict corporate failure