Journal of Credit Risk

Risk.net

New risk analysis tools with accounting changes: adjusted Z-score

Seong Cho, Liang Fu and Yin Yu

ABSTRACT

Altman's Z-score has been used for several decades to calculate bankruptcy probability. However, the conventional Z-score fails to consider possible earnings manipulations that could change the fundamental accounting figures and their implications for investors' decision models. We reconstruct the Z-score, making adjustments for earnings management.We apply the adjusted Z-score to measure the degree of deviation from bankruptcy probability for the bankruptcy sample. We find that the Z-score is overstated (respectively, understated) for the income-increasing (respectively, income-decreasing) earnings-management sample. Furthermore, we find that the adjusted Z-score performs better than the Z-score for bankruptcy predictions.

To continue reading...

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an indvidual account here: