The Altman Z Score Does Not Predict Bankruptcy

descriptionPublicationkeyboard_double_arrow_right Article , Other literature type 01 Jan 2020 English Publisher:Elsevier BVJournal:SSRN Electronic Journal (eissn: 1556-5068,

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Authors: J.B. Heaton;

doi: 10.2139/ssrn.3570149

The Altman Z Score Does Not Predict Bankruptcy

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Abstract

The Altman Z Score (AZS) does not predict bankruptcy. The false positive rate of the AZS is 98%-99%. The AZS fails as a predictive model because it does not incorporate market evidence bearing on bankruptcy probability, specifically, returns, debt to an approximation of market value of assets, and stock price. In a probit model, AZS is statistically insignificant in the presence of these market variables.

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