Review of Accounting Studies

, Volume 9, Issue 1, pp 5–34

Assessing the Probability of Bankruptcy

  • Stephen A. Hillegeist
  • Elizabeth K. Keating
  • Donald P. Cram
  • Kyle G. Lundstedt

DOI: 10.1023/B:RAST.0000013627.90884.b7

Cite this article as:
Hillegeist, S.A., Keating, E.K., Cram, D.P. et al. Review of Accounting Studies (2004) 9: 5. doi:10.1023/B:RAST.0000013627.90884.b7


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.

bankruptcy predictionoption-pricing modelsZ-ScoreO-Score

Copyright information

© Kluwer Academic Publishers 2004

Authors and Affiliations

  • Stephen A. Hillegeist
    • 1
  • Elizabeth K. Keating
    • 2
  • Donald P. Cram
    • 3
  • Kyle G. Lundstedt
    • 4
  1. 1.Kellogg School of ManagementNorthwestern UniversityEvanston
  2. 2.Kennedy School of GovernmentHarvard UniversityCambridge
  3. 3.College of Business and EconomicsCalifornia State UniversityFullerton
  4. 4.VaRisk, Inc.San Francisco