The Altman ‘Z’ is ‘50’ and Still Young: Bankruptcy Prediction and Stock Market Reaction Due to Sudden Exogenous Shock

Posted: 14 Feb 2019

See all articles by Rajeeb Poudel

Rajeeb Poudel

Western Oregon University

Dev Prasad

University of Massachusetts Lowell

Ravi Jain

University of Massachusetts Lowell

Date Written: December 15, 2018

Abstract

This study is motivated by the continuing popularity of the Altman Z-score as a measure of distress risk. Altman first introduced the ‘Z’ score in 1968 and 50 years later it is still going strong as a means to predicting bankruptcy. During these 50 years, academicians have studied the usefulness of the Z-score in a variety of countries and scenarios including various financial crises. This study contributes to the literature by providing a hitherto unexplored perspective through the examination of the relationship between stock market returns and the probability of bankruptcy due to an unexpected sudden shock. The terrorist attacks on September 11, 2001 on the World Trade Center in New York led to a financial crisis. Following the attack, the US stock market dropped dramatically. We find evidence that firms which had higher bankruptcy risk experienced greater negative returns following the attack. This study suggests that the Altman Z-score is likely to be useful in identifying firms with a higher risk of financial failure and consequent larger negative stock returns in the event of an exogenous sudden shock. This should prove to be useful to investors, creditors, board members and managers.

Keywords: Altman Z-Score, Bankruptcy Probability, Distress Risk, Stock Market Returns, Sudden Shock, and Financial Crisis

JEL Classification: G01, G14, G28, G30, G32, G33, G41

Suggested Citation

Poudel, Rajeeb and Prasad, Dev and Jain, Ravi, The Altman ‘Z’ is ‘50’ and Still Young: Bankruptcy Prediction and Stock Market Reaction Due to Sudden Exogenous Shock (December 15, 2018). Available at SSRN: https://ssrn.com/abstract=3328137

Rajeeb Poudel (Contact Author)

Western Oregon University ( email )

Monmouth, OR 97361
United States
97361 (Fax)

Dev Prasad

University of Massachusetts Lowell ( email )

1 University Ave
Lowell, MA 01854
United States

Ravi Jain

University of Massachusetts Lowell ( email )

Lowell, MA 01854
United States

HOME PAGE: http://www.uml.edu

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