Introduction

Bankruptcy for a company is a final declaration of its inability to sustain current operations given its
current debt obligations. Practically all firms must have some debt load to expand operations or just
to survive. Good economic planning often requires a firm to finance some of its operations with
debt. The degree to which a firm has debt in excess of assets or is unable to pay its debt as it comes
due are the two most common factors in bankruptcy. Because business failure is a major concern to
the parties involved and can create high costs and heavy losses, its prediction is highly beneficial. If
bankruptcy could be predicted with reasonable accuracy ahead of time, firms could better protect
their businesses and could take action to minimize risk and loss of business and perhaps even
prevent the bankruptcy itself. While bankruptcy is a worldwide problem, Thailand has been
especially hard hit by bankruptcy since the Asian crisis in 1997. As a result of the crisis, Thailand
instituted a new bankruptcy act to boost the Thai economy. There were many purposes of the act
but one of the most important was the protections it offered insolvent companies. According to
Urapeepatanapong, Sethsathira and Okanurak (1998), the Act provides incentives to foreign
creditors that allow them to inject funds to reorganize businesses without some of the fears that had
held them back in the past. Numerous studies have been conducted to analyze the impact of
bankruptcy in Thailand (Reynolds, et al, 2002; Urapeepatanapong, Sethsathira and Okanurak (1998).
Some of these have used business ratios to analyze bankruptcy potential. (See: Clark & Jung, 2002;
Brietzke, 2001; Pugh & Dehesh, 2001; Haley, 2000; and Tirapat & Nittayagasetwat, (1999). Only two
of these studies specifically addressed bankruptcy in Thailand (Reynolds, et al, 2002 & Tirapat &
Nittayagasetwat, 1999) with the rest addressing the overall Asian crises with a general emphasis in
South Korea (Clark & Jung, 2002; Haley, (2000), Indonesia (Brietzke, 2001), and Taiwan (Clark & Jung,
2002). The studies indicated above have generally tended to indicate that financial strength is a
critical factor in determining a firm’s longevity. Environmental factors such as global competition,
changing customer preferences, new legal requirements and changing social norms exert
tremendous pressure on a firm and can force it into bankruptcy. As these pressures continue to
accelerate, financial analysts seek better ways to predict bankruptcy and avoid the corresponding
losses that come with it. It would seem intuitive, therefore, that finding better ways to predict
bankruptcy in Thailand would enhance its position on the world stage and make it a more attractive
alternative for investment dollars. This is all the more important today given that so

much of the investment that would have come to Thailand in the past now appears to be going to
China. A review of the literature indicates that Fitzpatrick (1931) was, perhaps, the first researcher to
use ratio analysis to compare firms that had failed and firms that had not failed. Fitzpatrick used a
univariate analysis of 13 ratios to indicate failure. The Fitzpatrick model did not, however, show a
significant relationship with failure. Beaver (1966a and 1968a) also used univariate analysis in his
prediction model and did find a significant relationship. His work is generally considered to be the
first significant work in the area. Altman (1968b) expanded on the work of Beaver by using multiple
discriminant analysis to various bankrupt and non-bankrupt groups and to use a variety of different
ratio groups to predict business failures. After almost forty years, Altman’s Z-Score is still widely
regarded by researchers as an indicator of a company’s financial well being. In 1993, Altman revised
his model to incorporate a “four variable Z-Score” prediction model (Altman, 1993). Altman felt this
revised model significantly improved the predictive ability of his model and made it simpler to
incorporate. Ohlson (1980) is believed to be the first to develop a model using Multiple Logistic
Regression (Logit) to construct a probabilistic bankruptcy model in predicting bankruptcy. Ohlson
claimed that his study had one important advantage: the reports indicated at what point in time the
financial statements were released to the public, and one could therefore check whether the
company entered bankruptcy prior to, or after the date of release for the financials. Ohlson claimed
that the previous studies did not explicitly consider the timing issue. Advances in the field have
continued to be made. As artificial intelligence has developed with new computer capabilities,
artificial neural network models have been developed. While such models date back to the 1950s, it
was not until the development of faster computers that such analysis could be practically used in the
analysis of bankruptcy. The work of Luther (1998) significantly expanded the use of the artificial
neural network to bankruptcy prediction. The use of recursive partitioning algorithms has also been
used in bankruptcy prediction. This model uses a binary classification tree wherein a univariate rule
is associated to any node. The risk of the final nodes and the risk of the entire tree are calculated
after the classification tree is constructed. New objects descend the tree and fall into a final node
where they are identified as to group membership for that object. The associated probability is also
determined. The above studies inspired later researchers to attempt to find out if analysis of the
financial statements could be used to proactively predict bankruptcy rather than to merely react to
it when it occurred. According to Cybinski (2001), the major

Journal of Accounting and Corporate Governance

difference between the early and late studies was that early studies were concerned with
explanation rather than prediction and they focused on process rather than outcome. The “Z
Scores” developed by Altman, and the “Logit” analysis developed by Ohlson, became tools that were
invaluable to financial managers in managing their bankruptcy exposure. This is particularly
important for firms engaged in the riskier activities of investing in foreign firms where they do not
have a good understanding of the cultural, legal and ethical environment of the foreign country. This
is a significant problem for Thailand since it depends so heavily on foreign investment and the trust
of international financiers. The purpose of this study therefore, is to determine whether the work
of Ohlson and Altman can be applied to firms operating in Thailand. Specifically, the study seeks to
compare the accuracy level between Ohlson’s O-score and Altman’s Z-score to bankrupt and
nonbankrupt firms with different asset sizes. While other studies have already studied Altman’s Z-
score in Thailand, a review of the literature does not indicate that a comparison of the two methods
using the same data has been done there. Given the above purpose, this study seeks to answer the
question: What is the difference in bankruptcy predictive ability between Altman’s and Ohlson’s
models to Thai firms with different asset sizes? Altman’s Z-Score has been examined on numerous
occasions for firms in all parts of the world – including Thailand (see, for example, Tirapat &
Nittayagasetwat, 1999). This same review of the literature (late 2003) does not indicate the use of
the O-Score in Thailand, nonetheless, it would be useful to make a side by side comparison of the
two methods using the same data to determine if one performs better than the other in the Thai
environment. There have been numerous studies outside of Thailand that compare the two
methods (See for example, Holmen, 1988; Grice & Ingram, 2001; Ginoglou et al, 2002). The results
of these side-by-side studies have not been conclusive. For example Ginoglous et al, (2002)
compared 40 Grecian firms – 20 healthy and 20 problematic – using both a logit model and a
multiple discriminant analysis model but did not find that one performed significantly better than
the other. Whether this same result would be found in Thailand is of interest and could provide an
impetus for others to further investigate the two methods in Thailand. The hypotheses addressed
in this study are: H01. There is no difference in predictive ability between Ohlson’s logit model and
Altman’s four-variable model of large asset firms. H02. There is no difference in predictive ability
between Ohlson’s logit model and Altman’s four-variable model of small asset firms. The population
of this study is the firms listed on the Stock Exchange of Thailand. From this population a sample of
60 failed or financially distressed firms and 60

non-failed firms was selected. A failed firm or financially distressed firm is one that either: (1) had
been liquidated during the current year, (2) had received an audit that expresses concern about the
going concern capabilities of the firm, (3) had been closed down by governmental authorities, (4)
had been asked to submit restructuring plans by the Bank of Thailand or the Stock Exchange of
Thailand or (5) had filed bankruptcy proceedings in one or more countries or some other notification
indicating bankruptcy proceedings. These activities must have occurred sometimes between 1998
and 2004. To be selected for study, all firms must have been in business and published financial
statements for each of the three years prior to failure. Financial information, including all financial
statements was drawn from the e-library of the Stock Exchange of Thailand. For each of the firms
selected, all the appropriate ratios required by Ohlson and Altman were calculated. A few
adjustments had to be made to the published statements to make them more uniform and
comparable. A coding sheet was used for data collection. The coding sheet was developed on an
Excel spreadsheet and included the name of company, ticker symbol, SIC code, most recent year of
financials, and date financial distress was detected (for failed firms only). For each of the three
preceding years prior to distress the coding sheet listed total assets, total liabilities, current assets,
current liabilities, net income (for four years) and cash flows from operations. Each of the 60 failed
and non-failed firms were matched using the SIC code and asset size. They were then analyzed using
Ohlson’s logit bankruptcy prediction model and Altman’s Z-score as discussed earlier. The computer
program selected for use was SPSS.

Results of the Study: The results of the classification accuracy of both Ohlson’s model and Altman’s
model were compared and are reported in table 1.

Table 1: Classification Comparison of Ohlson's O-score model and Altman’s Z- score model for large
asset firms.

Year 1 Year 2 Year 3

Classification Ohlson Altman Ohlson Altman Ohlson Altman

Bankrupt 85.71% 90.48% 85.71% 100.00% 85.71% 100.00%

Non-bankrupt 60.00% 40.00% 60.00% 40.00% 60.00% 40.00%

Overall 69.64% 58.93% 69.64% 62.50% 69.64% 62.50%

The Z-test for this research hypothesis was conducted at the 95% confidence level in order to test if
there was a significant difference between the predictive accuracy of the two models in predicting
bankrupt and nonbankrupt large asset firms.

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6

A comparison of the classification accuracy between the two models affirms that the overall
predictive ability of Ohlson’s model is higher in all three years preceding bankruptcy than that of
Altman’s four-variable model. The overall difference between Ohlson’s model and Altman’s model
respectively was 69.64% to 58.93% for the first year prior to bankruptcy, 69.64% and 62.50% for the
second year prior to bankruptcy and 69.64% to 62.50% for the third year to bankruptcy. An
examination of the data shows that for bankrupt firms only, the Altman model had a higher
predictive accuracy than Ohlson’s model. For the bankrupt firms, the predictive accuracy of
Altman’s model and Ohlson’s model respectively was 90.48% to 85.71% for the first year prior to
bankruptcy, 100% and 85.71% for the second year prior to bankruptcy, and 100% and 85.71% for the
third year prior to bankruptcy. For nonbankrupt firms Ohlson’s model had a higher level of
predictive accuracy than did Altman’s model. For the nonbankrupt firms, the predictive accuracy of
Ohlson’s model and Altman’s model respectively was 60% and 40% for each of the three years prior
to bankruptcy. This higher level of predictive accuracy for nonbankrupt firms is the reason why the
Ohlson model had a higher overall predictive accuracy. The hypothesis was tested at a 95 percent
level of confidence. The hypothesis for test of significance of a difference between the two models
took the following form:

H0: PB,O - PB,A = 0, PNB,O - PNB,A = 0

HA: PB,O - PB,A ≠ 0, P</SPAN>NB,O - PNB,A ≠ 0

Where P = The classification accuracy

B = Bankrupt

NB = Nonbankrupt

O = Ohlson’s model

A = Altman’s model A Z having a value equal to or greater than Z=1.96 is considered significant
at the 0.05 level (two-tailed test for significance of a difference between two model) Table 2 shows
the results of a comparison of the predictive ability of Ohlson’s and Altman’s models, one, two and
three years prior to bankruptcy. The table also shows the Z-test values and the related level of
significance for each comparison. The Z-tests were conducted to determine whether there is a
significant difference between both models in predicting bankruptcy, nonbankruptcy and overall
accuracy of the sample of firms.

Table 2: Z-test Statistical Comparison of Predictive Accuracy of Ohlson's Logit and Altman's
Bankruptcy Prediction Models

Predictive accuracy % Year Prior to Bankruptcy Classification Ohlson Altman Z Value

Significant Y/N

1 Bankrupt 85.71 90.48 -0.176 N

Nonbankrupt 60.00 40.00 1.54 N

 Overall 69.64 58.93 0.89 N

2 Bankrupt 85.71 100.00 -0.499 N

Nonbankrupt 60.00 40.00 1.54 N

Overall 69.64 62.50 0.58 N

3 Bankrupt 85.71 100.00 -0.499 N

Nonbankrupt 60.00 40.00 1.54 N

Overall 69.64 62.50 0.58 N

As stated above, significance is demonstrated at a Z of 1.96 or greater. An examination of the table

shows that the tests for differences in the prediction of bankruptcy firms in the first, second and
third years prior to bankruptcy are not significant at the 0.05 level. Negative Z-values show that
Altman’s model performs better in all of the three years examined. The statistical results in
predicting bankrupt firms, therefore, are not significant. An examination of Table 2 shows that the
test for differences in the prediction of nonbankrupt firm are also not significant at the 0.05 level in
the first, second and third years prior to bankruptcy. The positive Z-tests show that Ohlson’s model
performed better in all three years prior to bankruptcy. The statistical results in predicting
nonbankruptcy firms are, therefore, also not significant. A review of Table 2 also shows that for the
overall predictive accuracy of the two models, the Z-test for overall accuracy was not statistically
significant for years one, two and three prior to bankruptcy. Therefore the null hypothesis was not
rejected and support was not found for the alternative hypothesis. The tests for difference in
predictive ability between the two models indicate that no model could be considered superior to
the other. The second hypothesis is related to the comparative classification of whether there is a
difference in predictive ability between the Ohlson’s and Altman’s four-variable model for small
asset firms. The results of the classification accuracy of both Ohlson’s model and Altman’s model are
compared and reported in Tables 9.

Journal of Accounting and Corporate Governance

Table 3: Percentage Classification Comparison of Ohlson’s model and Altman’s model for small asset
firms.

Year 1 Year 2 Year 3

Classification Ohlson Altman Ohlson Altman Ohlson Altman

Bankrupt 71.79% 94.87% 69.23% 94.87% 71.79% 94.87%

Non- Bankrupt

80.00% 16.00% 68.00% 28.00% 64.00% 36.00%

Overall 75.00% 64.06% 68.75% 68.75% 68.75% 71.88%

The test for this research hypothesis Z-test statistic was conducted with a 95% confidence level in
order to test the significance of the difference between both models in predicting overall, bankrupt
and nonbankrupt accuracy of small firms. Comparing the classification accuracy between the two
models affirms that the overall predictive ability of Ohlson’s model is higher than Altman’s model in
the first year prior to bankruptcy. The overall prediction percentages for the Ohlson model and the
Altman model were 75.00% and 64.06% respectively. An examination of the tables show that for
the second year prior to bankruptcy both models have the same predictive accuracy with an
accuracy rate of 68.75% to 68.75%. However, in the third years prior to bankruptcy Altman’s model
demonstrates a higher accuracy than Ohlson’s model. The predictive accuracy in the third year prior
to bankruptcy for the Altman and Ohlson models was 71.88% and 68.75% respectively. For bankrupt
firms Altman’s model exhibits a higher predictive accuracy than Ohlson’s model in all three years
preceding bankruptcy. The predictive accuracy in the three years prior to bankruptcy for the Altman
and Ohlson models was 94.87% to 71.79% for the first year prior to bankruptcy, 94.87% to 69.23%
for the second year prior to bankruptcy and 94.87% to 71.79% for the third year prior to bankruptcy.
In the case of nonbankrupt firms the Ohlson model preformed with greater accuracy than the
Altman in all three year. The predictive accuracy was 80.00% to 16.00% for the first year, 68.00% to
28.00% for the second year and 64.00% to 30.00% for the third year. The hypothesis was tested at
the 95 percent level of confidence. The hypothesis for the test of significance of a difference
between two models for small asset firms took the following form:

H0: PB,O - PB,A = 0, PNB,O - PNB,A = 0

HA: PB,O - PB,A ≠ 0, P</SPAN>NB,O - PNB,A ≠ 0

Where P = The classification accuracy

B = Bankrupt

NB = Nonbankrupt

O = Ohlson’s model

A = Altman’s model A Z having a value equal to or grater than Z=1.96 is considered significant at
the 0.05 level (two-tailed test for significance of a difference between the two models). Table 4
shows the results of a comparison of the predictive ability of the two models, one, two and three
years prior to bankruptcy. Z-test values and the related level of significance are also reported for
each comparison. The Z-tests were conducted to determine whether there is significant difference
between each model in predicting bankruptcy and nonbankruptcy and their overall prediction
accuracy for small firms in the first, second and third years prior to bankruptcy.

Table 4: Comparison of Predictive Accuracy Ohlson's and Altman's(1993) bankruptcy prediction

model and Z-test statistics for Small asset firms.

Predictive accuracy %

Year Prior to Bankruptcy

Classification Ohlson

Altman

Z Value Significance

1 Bankrupt 71.79 94.87 1.22 N

Nonbankrupt 80.00 16.00 3.95 Y

Overall 75.00 64.06 0.89 N

2 Bankrupt 69.23 94.87 -1.37 N

Nonbankrupt 68.00 28.00 2.74 Y

Overall 68.75 68.75 0 N

3 Bankrupt 71.79 94.87 1.22 N

Nonbankrupt 64.00 36.00 1.92 N

Overall 68.75 71.88 -0.25 N

Table 4 shows that the tests for bankrupt firms were not significant at the 0.05 significance level.
While the negative Z-values show that Altman’s model performs better in all three years of data for
these bankrupt firms the statistical results in predicting bankrupt firms are not significant.

Journal of Accounting and Corporate Governance

10

Table 4 also shows that the test for difference in the predictive ability for nonbankrupt firm are
significant for the first and second year but not in the third year prior to bankruptcy. Again, the
positive Z-values show that Ohlson’s model performs better in all three years for nonbankrupt firms
but the differences are not significant. For the overall predictive accuracy of the two models, the Z-
test for overall accuracy was not statistically significant for years one, two and three prior to
bankruptcy. Therefore the null hypothesis was not rejected and support was not found for the
alternative hypothesis. The test for difference in predictive ability between the two models
indicates that no model could be considered superior to other. There is no difference in predictive
ability between Ohlson’s and Altman’s four-variable model of small asset firms. Concurrent with
classification accuracy between Ohlson’s and Altman’s model, is the classification of errors. Two
types of errors can exist. Type α errors will predict a failed firms as a nonfailed firm, while a type β
error will predict a nonfailed firm as a failed firm. Ohlson’s model appeared to be higher in type α
errors with 23.33% in year one prior to bankruptcy, 25.00% in year two prior to bankruptcy, and
23.33% in year three prior to bankruptcy. Altman’s model showed less type α errors with 6.67% for
one year prior to bankruptcy, 3.33% for the second year prior to bankruptcy and 3.33% three years
prior to bankruptcy. The type β error rate coincided with the classification accuracy of the bankrupt
firms. There were fewer type β errors in Ohlson’s model than in Altman’s model. Ohlson’s model
had 20.00% type β in year one, 21.1% in year two, and 23.33% in year three. At the same time Type
β errors for Altman’s (1993) model was 31.67% in year one, 35.00% in year two, and 38.33% in year
three. A type α error would seem to be significantly more costly than a type β from the point of view
of bankers and investors. Type β errors would appear to be more costly from the point of view of
healthy firms.

Conclusions

Hypothesis one reviews the comparative classification in predictive ability between Ohlson’s model
and Altman’s four variable model of large asset firms. Ohlson’s model reflected overall higher
predictive accuracy for year one, year two, and year three, with an overall predictive accuracy of
69.64%. In terms of bankrupt predictive ability of large asset firms Altman’s model achieved higher
accuracy for year one with an accuracy rate of 90.48% for year one and a 100% accuracy rate for
both year two and year three. However, with regard to nonbankrupt firms, Altman’s model
exhibited less predictive accuracy. For each of the three years of data gathered, the Altman model
had a predictive accuracy of only

40%. A test for difference of the above results indicated that these differences in hypothesis two
were not significant. Thus, there is the implication that neither of the two models could be
considered superior to the other for predicting bankruptcy of large asset Thai firms. Hypothesis two
examined the comparative predictive ability between Ohlson’s model and Altman’s model to small
asset firms. The results were similar to that found for large asset firms, that is, Ohlson’s model was
slightly higher in overall predictive accuracy than Altman’s model. With regard to small asset
bankrupt firms, Altman’s model achieved higher accuracy for year one with a predictive accuracy
rate of 94.87%, year two with a predictive accuracy rate of 94.87% and year three with a predictive
accuracy rate of 94.87%. In the case of nonbankrupt predictive ability, Altman’s model
demonstrated less accuracy than Ohlson’s model in each of the three years examined, however a
test for difference indicated that these differences in hypothesis three were not significant. This
implies that neither of the two models could be considered superior to the other for predicting
bankruptcy of small asset Thai firms.