TY - JOUR
T1 - Assessing the probability of bankruptcy
AU - Hillegeist, Stephen A.
AU - Keating, Elizabeth K.
AU - Cram, Donald P.
AU - Lundstedt, Kyle G.
N1 - Funding Information:
We gratefully acknowledge the helpful advice and comments from two anonymous reviewers, Sudipta Basu, Walter Blacconiere, Anand Bodapati, Stephen Brown, Mary Ellen Carter, Federico Galizia, Richard Grinold, Jim Guo, William Hopkins, Phillip Joos, Duane Kennedy, Patricia Ledesma, Dennis Lamont, Kin Lo, Robert Magee, Robert McDonald, Carlos Mello-e-Souza, James Ohlson (the editor), Mitchell Petersen, John Quigley, Leonard Soffer, Matt Spiegel, Beverly Walther, Charles Wasley, Ross Watts, Joanna Wu, Benjamin Wurzburger, Jerry Zimmerman, and seminar participants at Emory, Insead, Northwestern, Rochester, Yonsei University, Barclays Global Investors, the 2002 C.R.E.D.I.T. Conference, and the 2002 American Accounting Association National and Midwest Regional meetings. George and Julia Yong provided excellent research assistance. Hillegeist and Keating appreciate financial support from the Accounting Research Center at the Kellogg School of Management. Cram and Lundstedt are thankful for support from the Sloan School of Management and the Fisher Center for Real Estate and Urban Economics, U.C. Berkeley, respectively.
PY - 2004/3
Y1 - 2004/3
N2 - 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.
AB - 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.
KW - Bankruptcy prediction
KW - O-Score
KW - Option-pricing models
KW - Z-Score
UR - http://www.scopus.com/inward/record.url?scp=3843076403&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=3843076403&partnerID=8YFLogxK
U2 - 10.1023/B:RAST.0000013627.90884.b7
DO - 10.1023/B:RAST.0000013627.90884.b7
M3 - Article
AN - SCOPUS:3843076403
SN - 1380-6653
VL - 9
SP - 5
EP - 34
JO - Review of Accounting Studies
JF - Review of Accounting Studies
IS - 1
ER -