Using A Modified Altman’s Z-score Model to Predict Corporate Bankruptcy

Abstract: Previous research suggests that industry-relative financial ratios are more stable than unadjusted ratios. However, most bankruptcy studies use unadjusted financial ratios to develop bankruptcy prediction models. In this study, we develop an industry-relative bankruptcy model based on Altman’s Z-score model. Using a balanced combination of accounting- and market-based ratios from 258 bankrupt and nonbankrupt companies, we develop a modified Altman’s Z-score model. The result indicates that a balanced combination of industry-relative accounting- and market-based ratios not only captures different aspects of bankruptcy risk, but also may yield a relatively high classification rate. As such, our findings help managers more accurately estimate bankruptcy risk and thus, have a better opportunity to take corrective actions early, enhancing corporate financial sustainability.

Keywords: bankruptcy; financial failure; financial sustainability; industry-relative ratio; logit models

JEL codes: G01, G32, G33