Corporate Financial Distress, Restructuring, and Bankruptcy, 4th Edition
by Edward I. Altman, Edith Hotchkiss, Wei Wang
CHAPTER 12Distress Prediction Models: Catalysts for Constructive Change ‐Managing a Financial Turnaround*
We have frequently been asked by managers and analysts the difficult question, “Now that your model has classified the entity as having a high probability of failure, what should be done to avoid this dismal fate?” Not being an operating manager or turnaround consultant, we had to throw up our hands and reluctantly reply, “Get yourself some new management or specialists in crisis management,” or, even less satisfying, “That is your problem!” Needless to say, these answers were not accepted with applause, nor did the response capture the spirit of a true early‐warning system. Such a system usually connotes prescribed rehabilitative action when the warnings are in other areas, such as medicine, weather, or military science. Unfortunately, management science applications of early warning systems are typically unique to the entity, and it is difficult to generalize rehabilitative prescriptions.
Our attitude toward this important and inevitable outgrowth of distress prediction has changed. One important incident has taught us a valuable lesson, one which is, we believe, transferable to other crisis situations. The lesson emanated not from a conceptual, academic analysis of the problem but from the application of the Z‐Score model (Chapter 10 herein) to a real‐world problem by a remarkably perceptive chief executive officer (CEO). Let us review the case of GTI Corporation, a ...