Assessing the Probability of Bankruptcy
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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.
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- Assessing the Probability of Bankruptcy
Review of Accounting Studies
Volume 9, Issue 1 , pp 5-34
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- Kluwer Academic Publishers
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- bankruptcy prediction
- option-pricing models
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- Author Affiliations
- 1. Kellogg School of Management, Northwestern University, 2001 Sheridan Road, Room 6223, Evanston, IL, 60208
- 2. Kennedy School of Government, Harvard University, Littauer 115, 79 JFK St., Cambridge, MA, 02138
- 3. College of Business and Economics, California State University, Fullerton, 800 N. State College Blvd., LH-360, Fullerton, CA, 92834
- 4. VaRisk, Inc., 116 Lyon St., San Francisco, CA, 94117