COMPARISON OF ALTMAN Z SCORE AND BEX INDEX AS PREDICTORS OF STOCK PRICE MOVEMENTS ON THE SAMPLE OF COMPANIES FROM CROATIA

Headnote

Key words: Financial ratios, Altman Z score, BEX index, Stock prices, prediction quality

ABSTRACT

Modern finance is constantly discovering different tools and methods for prediction of future business results of companies and stock price movements more exactly. Although the "perfect predictor" is a mere illusion, the obsession of finding it is shared between thousands of investors as well as scientists who are developing new financial models and ratios on a daily basis. One of the most famous groups of financial ratios has a sole purpose to determine the chance of success / bankruptcy for all types of companies. This research puts to test two financial scoring models of this type: Altman Z score and BEX index. Altman Z score is the worlds' most recognizable tool of measuring business quality by expressing the probability of a company to go (or not to go) bankrupt. BEX is an index which has a goal of measuring business excellence of companies, and was developed on a sample of Croatian companies five years ago.

The empirical research is based on a data-set of companies on Zagreb Stock Exchange (ZSE) in the period from 2006 to 2011. Results show that lagged dependent variable (price) is statistically significant and positive in all models. Moreover each of the independent variables is also positive and statistically significant with varying strength of influence, except for BEX. However, when controlling for crisis, BEX shows positive and significant influence on the stock price in periods without crisis. Concentrating on our findings within this research, we can suggest that investors interested in fundamental base of a stock and long term investing should use Z-score and BEX as a support in their decision making.

(ProQuest: ... denotes formulae omitted.)

1 INTRODUCTION

Stock market is a global playground where everyone out of millions of investors, who vary vastly by their investment strategies, risk aversion, purchasing power, etc., has the same goal: beating the market. This goal often becomes an obsession for a stock investor and it can go a long way. Beating the market implies prediction of future trends in stock prices which is done with the help of numerous financial analysis tools usually divided into groups as fundamental and technical techniques.

Regarding the fundamental analysis, modern finance...