Applying Altman’s Z-Score to the Financial Crisis : an empirical study of financial distress on Oslo Stock Exchange

Abstract

In this thesis, I study the financial distress status for a sample of 180 enterprises listed on Oslo Stock Exchange. The thesis addresses the impact of the financial crisis on these enterprises and has a particular focus on the probability of financial distress, measured by Edward Altman’s Z-Score models. I find evidence that manufacturers listed on Oslo Stock Exchange were generally more financially distressed than non-manufacturers, which is consistent with what one could observe at a national level. The estimated probability of default for the listed enterprises increased substantially during the crisis. The findings also indicate that the Z-Scores ability to predict bankruptcies significantly worsened during the financial crisis. Moreover, on the subject of capital structure, I document a positive relationship between financial distress and equity issuance within the financial crisis. Also, I find evidence that supports both the market timing theory and pecking order theory of corporate finance. Finally, the results indicate that there is evidence of a structural break around the outbreak of the financial crisis, which means that the enterprises listed on OSE were more financially distressed in 2008 and 2009, relative to the years 2004 to 2007.