Assessing the Probability of Bankruptcy

Stephen A. Hillegeist (), Elizabeth K. Keating, Donald P. Cram and Kyle G. Lundstedt
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Stephen A. Hillegeist: Northwestern University
Elizabeth K. Keating: Harvard University
Donald P. Cram: California State University
Kyle G. Lundstedt: VaRisk, Inc.

Review of Accounting Studies, 2004, vol. 9, issue 1, No 1, 5-34

Abstract: Abstract We assess whether two popular accounting-based measures, Altman’s (1968) Z-Score and Ohlson’s (1980) O-Score, effectively summarize publicly-available information about the probability of bankruptcy. We compare the relative information content of these Scores to a market-based measure of the probability of bankruptcy that we develop based on the Black–Scholes–Merton option-pricing model, BSM-Prob. Our tests show that BSM-Prob provides significantly more information than either of the two accounting-based measures. This finding is robust to various modifications of Z-Score and O-Score, including updating the coefficients, making industry adjustments, and decomposing them into their lagged levels and changes. We recommend that researchers use BSM-Prob instead of Z-Score and O-Score in their studies and provide the SAS code to calculate BSM-Prob.

Keywords: bankruptcy prediction; option-pricing models; Z-Score; O-Score (search for similar items in EconPapers)
Date: 2004
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DOI: 10.1023/B:RAST.0000013627.90884.b7

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