Application of the Zavgren Model for Assessing Financial Insolvency in the Construction Industry (2018–2022)
Abstract
Objective: To identify the feasibility of applying the Zavgren model for estimating the probability of financial insolvency among Colombian construction firms between 2018 and 2022.
Design/Methodology: Adopting a quantitative, exploratory, and descriptive approach this study examines the predictive capacity of the Zavgren model within the context of the Colombian construction industry. To this end, a sample of 734 firms that systematically reported financial information from 2018 to 2022 was analyzed.
Findings: More than 80% of the firms assessed were classified in the bankruptcy zone, which reflects significant financial vulnerability within the industry. However, year-over-year variation in insolvency risk was also observed, suggesting that despite the model’s indication of elevated overall risk, insolvency conditions across firms are heterogeneous.
Conclusions: The findings reveal a high proportion of firms at risk of insolvency, as well as substantial heterogeneity in risk levels across the sample. While the Zavgren model proves effective in identifying overall insolvency risk within the industry, its ability to discriminate between different levels of risk remains limited, likely due to industry-specific factors and characteristics not accounted for in the model.
Originality: This is the first study to apply the Zavgren model in the Colombian context, offering insights into its relevance and limitations. It combines cross-sectional and longitudinal statistical analyses over a five-year period, enhancing understanding of financial insolvency dynamics and the impact of firm-level endogenous variables. The study also underscores the importance of adapting insolvency prediction models to the specific conditions of emerging markets such as Colombia.
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