Bankruptcy Prediction: Book Value or Market Value?
Korean Insurance Journal
43 Pages Posted: 3 Apr 2010
Date Written: July 20, 2007
Shared concerns about their firm’s financial condition by managers, stockholders, lenders and employees create continual inquiries and recurrent attempts to answer the incessant question about how financial distress can be predicted or what reveals the bankruptcy of firms. Despite numerous attempts for bankruptcy prediction and their applications over three decades after Altman (1968)’s seminal study, the financial distress prediction researches have not seemed to reach an unequivocal conclusion. I investigate the postulations concerning the Altman’s Z-score and the option-based measure based on argument that the Z-score has lost its significance since its introduction.
Based on results, I learn that Altman’s Z-score loses its significance as a bankruptcy prediction measure due to two possible grounds; the reduction of prediction power for long-term prediction and the loss of significance for recent years’ data. In addition, I find that the option-based measure provided significant results as a prediction measure for later years. I believe that the reduction of prediction time span of the Z-score and the better performance of the option-based measure implies that bankruptcy prediction should be based on immediately and continuously changing information about the event because the more efficient market shortens the information transition time in the market and discrete or sporadic variables mislay the interpretation of information concerning bankruptcy.
Keywords: Bankruptcy Prediction, Option-based Measure, Accounting-based Measure, Z-score, KMV
Suggested Citation: Suggested Citation