Abstract
Fifty years ago, I published the initial, classic version of the Z-score bankruptcy prediction models. This multivariate statistical model has remained perhaps the most well-known, and more importantly, most used technique for providing an early warning signal of firm financial distress by academics and practitioners on a global basis. It also has been used by scholars as a benchmark of credit risk measurement in countless empirical studies. Practical applications of the Altman Z-score model have also been numerous and can be divided into two main categories: (1) from an external analytical standpoint, and (2) from an internal to the distressed firm viewpoint. This paper discusses a number of applications from the former’s standpoint and in doing so, we hope, also provides a roadmap for extensions beyond those already identified.
Highlights
Over the last 50 years, I have learned a great deal from both academics and practitioners about the potential applications of the original Z-score models, Altman (1968), and have been motivated to build additional models to exploit and extend these applications as they became used in a variety of ways
This paper provides a discussion of those applications in the first category: from an external to the firm viewpoint
In the various documents provided by the Bank for International Settlement (BIS) when Basel II was first introduced in 1999, and discussed until implemented with an agreed text in 2004 (BIS 2004), our Z-score approach was referenced extensibly as an early template for bank internal rate based models to be used when external ratings are not available and are to be based upon the portfolios of banks in determining probability of default (PD), and for some very large banks, LGD
Summary
Over the last 50 years, I have learned a great deal from both academics and practitioners about the potential applications of the original Z-score models, Altman (1968), and have been motivated to build additional models to exploit and extend these applications as they became used in a variety of ways. This paper provides a discussion of those applications in the first category: from an external to the firm viewpoint. This viewpoint is perhaps the more obvious and numerous of those applications that I have identified myself and have been identified by many practitioners—for which I am most appreciative. In terms of third-party analysts, beyond the firm and its investors, are professionals in the security analysis, auditing, and financial advisory spaces. The associated fields of rating agencies and government regulators, both for banks and security transactions, can be identified as or potentially interested in accurate and cost-efficient techniques to provide early-warning measures of financial distress and indicators of the probability of default (PD) of counterparties.
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