Assessing the probability of bankruptcy

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

Research output: Contribution to journalArticle

445 Citations (Scopus)

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.

Original languageEnglish (US)
Pages (from-to)5-34
Number of pages30
JournalReview of Accounting Studies
Volume9
Issue number1
DOIs
StatePublished - Mar 2004
Externally publishedYes

Fingerprint

Bankruptcy
Z-score
Industry
Information content
Black-Scholes
Option pricing model
Coefficients

Keywords

  • Bankruptcy prediction
  • O-Score
  • Option-pricing models
  • Z-Score

ASJC Scopus subject areas

  • Business, Management and Accounting(all)

Cite this

Assessing the probability of bankruptcy. / Hillegeist, Stephen; Keating, Elizabeth K.; Cram, Donald P.; Lundstedt, Kyle G.

In: Review of Accounting Studies, Vol. 9, No. 1, 03.2004, p. 5-34.

Research output: Contribution to journalArticle

Hillegeist, Stephen ; Keating, Elizabeth K. ; Cram, Donald P. ; Lundstedt, Kyle G. / Assessing the probability of bankruptcy. In: Review of Accounting Studies. 2004 ; Vol. 9, No. 1. pp. 5-34.
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