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. Review of Accounting Studies, Vol. 9, No. 1, March 2004. 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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