Applications of Distress Prediction Models: What Have We Learned After 50 Years from the Z-Score Models?

Abstract

Fifty years ago, I published the initial, classic version of the Z-score bankruptcy prediction models. This multivariate statistical model has remained perhaps the most well-known, and more importantly, most used technique for providing an early warning signal of firm financial distress by academics and practitioners on a global basis. It also has been used by scholars as a benchmark of credit risk measurement in countless empirical studies. Practical applications of the Altman Z-score model have also been numerous and can be divided into two main categories: (1) from an external analytical standpoint, and (2) from an internal to the distressed firm viewpoint. This paper discusses a number of applications from the former's standpoint and in doing so, we hope, also provides a roadmap for extensions beyond those already identified.

Impact of Covid-19 on corporate solvency and possible policy responses in the EU

“…It is worth mentioning that studies like ( Hernandez Tinoco & Wilson, 2013 ; Hillegeist et al, 2004 ; Korol, 2013 ) and more recently ( Altman, 2018 ) advocated the use of coefficients from the original Altman model. Their findings suggest that bankruptcy predictions from the original coefficients are more robust compared to the predictions that are based on re-estimated factor loadings.…”

Insolvency and the Role of Auditors

“…Others made few attempts predicting possible cause of insolvency among them include Ramser and Foster in 1931 as well as (Back et al, 1997, andBeaver (1966) who explored multiple financial indicators of discriminative power for each measures, but the level of correct prediction were never absolute (Prusak, 2018). However, in 1968, Altman'S (Z-score) publication made a hallmark breakthrough, where impact of several indicators on the financial health condition of companies were evaluated using a combination of variables ion a single model of (Z-score) using a technique of multivariate linear discriminant analysis to accomplish this evaluation (Altman, 2018). According to Altma, Malgorzata, Erkki and Arto-Suvas (2017), Altman alongside other scientists thereafter developed many other models devoted to many American corporations and outside the United State of America countries (Altman & Narayanan, 1997).…”

Could The Insolvency Risk for Companies Traded on Bucharest Stock Exchange have been Identified? A Case Study Using the Altman Model

“…In the initial, classic version of the Z-score bankruptcy prediction model, Altman uses the following indicators (Altman, 1968):…”

“…Later, these patterns have been modified, as they became used in a variety of ways (Altman, 2018), and the variables X 1, X 2, X 3, X 4 and X 5 changed during the time (Dolejšová, 2014), replacing the Market value equity with the Book Value of Equity, being adapted for not publiclytraded on capital markets…”