Assessing the Probability of Bankruptcy

Posted: 4 Dec 2003

See all articles by Stephen A. Hillegeist

Stephen A. Hillegeist

Arizona State University (ASU) - W. P. Carey School of Business, School of Accountancy

Elizabeth K. Keating

Harvard University - John F. Kennedy School of Government

Donald P. Cram

State University of New York, Oswego

Kyle G. Lundstedt

affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

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.

Keywords: bankruptcy prediction, option-pricing models, Z-Score, O-Score

JEL Classification: M41, G33, C41, C52

Suggested Citation

Hillegeist, Stephen A. and Keating, Elizabeth K. and Cram, Donald P. and Lundstedt, Kyle G., Assessing the Probability of Bankruptcy. Available at SSRN: https://ssrn.com/abstract=465220

Stephen A. Hillegeist (Contact Author)

Arizona State University (ASU) - W. P. Carey School of Business, School of Accountancy ( email )

Tempe, AZ 85287-3706
United States
480-965-6614 (Phone)

Elizabeth K. Keating

Harvard University - John F. Kennedy School of Government ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States
617-495-9856 (Phone)
617-495-8963 (Fax)

Donald P. Cram

State University of New York, Oswego ( email )

307 Rich Hall
Oswego, NY 13126
United States
315-312-2533 (Phone)

Kyle G. Lundstedt

affiliation not provided to SSRN

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