ABSTRAK The economy of Indonesia has rapidly grown since its first economicturmoil in 1997/1998. The annual growth rate of the GDP exceeded 6% in the lastfour years despite the global economies slow down due to the consequences of‘bubble’ subprime mortgage that ruined most of the world’s financial institutions.The growth significantly energizes the local economic activities either in theindustrial market or in the capital market.In spite of the ‘bull’ market, the risk of financial distress remains alive andthe economic direction might change because of the volatility of businessenvironment. There is no firm protected or immune from financial adversity thatmay result in failure, insolvency, default or bankruptcy. Plummeting stock price,reduced dividend payment, consecutive net loss, massive lay-offs, pendingobligations and a fair number of other negative signs are common association withfinancial distress.Widely recognized, financial distress prediction models may be examinedto assess a firm’s economic situation for further purposes. Altman, Ohlson,Zmijewsky, Fulmer, and Springate are some of notable researchers to which theirmodels are referred to evaluating the soundness of a firm. However, each markethas its own financial distress environment that in consequence any financialdistress prediction model requires an evaluation whether or not the modeladequately fits to a certain market, in particular Indonesia for this case. Theimportance of predictors and accuracy will minimize producing misleading resultsfrom the economic forecast.The results of this testing against the first hypothesis showed that none ofthe adjusted models included all the variables of the base model, respectively.There were some variables with insufficient explanatory power to predict thecessation of activities of the tested firms. The second hypothesis argued that theadjusted models were less capable than those developed originally in terms ofaccuracy. ABSTRACT The economy of Indonesia has rapidly grown since its first economicturmoil in 1997/1998. The annual growth rate of the GDP exceeded 6% in the lastfour years despite the global economies slow down due to the consequences of‘bubble’ subprime mortgage that ruined most of the world’s financial institutions.The growth significantly energizes the local economic activities either in theindustrial market or in the capital market.In spite of the ‘bull’ market, the risk of financial distress remains alive andthe economic direction might change because of the volatility of businessenvironment. There is no firm protected or immune from financial adversity thatmay result in failure, insolvency, default or bankruptcy. Plummeting stock price,reduced dividend payment, consecutive net loss, massive lay-offs, pendingobligations and a fair number of other negative signs are common association withfinancial distress.Widely recognized, financial distress prediction models may be examinedto assess a firm’s economic situation for further purposes. Altman, Ohlson,Zmijewsky, Fulmer, and Springate are some of notable researchers to which theirmodels are referred to evaluating the soundness of a firm. However, each markethas its own financial distress environment that in consequence any financialdistress prediction model requires an evaluation whether or not the modeladequately fits to a certain market, in particular Indonesia for this case. Theimportance of predictors and accuracy will minimize producing misleading resultsfrom the economic forecast.The results of this testing against the first hypothesis showed that none ofthe adjusted models included all the variables of the base model, respectively.There were some variables with insufficient explanatory power to predict thecessation of activities of the tested firms. The second hypothesis argued that theadjusted models were less capable than those developed originally in terms ofaccuracy. |