Corporate failure prediction models : the perception of Maltese stockbrockers

Abstract

Information is key. The results produced by corporate failure prediction models is significant data. It would influence most stakeholders' decisions, in particular those taken by shareholders. Shareholders bear the greatest risk, since they are the last group to receive compensation for their shareholdings in the event of the collapse of their company. The closest link to someone investing in a company listed on the Maltese Stock Exchange (MSE) is the stockbroker. The main objective of this research is to give an insight of the usefulness and/or practicability of corporate failure prediction models on Maltese listed companies, along with the local stockbrokers' perception of the Maltese stock market. This investigation has materialised through an extensive selection of existing literature and empirically by means of interviews with seven local stock broking firms. The main prediction models are identified as Conventional Ratios, Z-Score, A-Score, Logit Analysis and Artificial Neural Networks. There are other techniques and software programs created by third party analysts and credit rating agencies. The findings indicate that there is no real incentive for advisors to take on the extra burden of these models. They do not feel the need to test most of the current listed companies for bankruptcy, as they have enough confidence in their financial health. Local advisors believe that the level of trading in the shares of the other listed companies is so negligible that it would not justify the time on more analysis. Performance is assessed through other techniques, which every stockbroker has in place. The general public is not really aware of the dangers in investing in a listed company. On the contrary, most of them stand to believe the fact that if a company is listed, it is an endorsement to its strength. This view is flawed. A company that is going bankrupt would therefore make people perceive this thing wrongly in respect of the Maltese Stock Exchange.