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64

Uhihuhqfhv
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whulvwlfv ri Frusrudwh Edqnuxswf| Xvlqj Fdslwdo Pdunhw Gdwd/ Mrxuqdo ri Ilqdqfh/ 68+7,/
4334491
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srudwh Edqnuxswf|/ Mrxuqdo ri Ilqdqfh/ 56/ 8;<93<1
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wu| Uhodwlyh Dqdo|vlv/ Qhz \run Xqlyhuvlw| Zrunlqj Sdshu1
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ri Dffrxqwlqj Uhvhdufk/ ;/ 4:<<51
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Vhfwlrq Dqdo|vlv zlwk d Elqdu| Ghshqghqw Yduldeoh/ Dphulfdq Mrxuqdo ri Srolwlfdo Vfl0
hqfh/ 75/ 459345;;1
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Vwxglhv/ 4/ 59:5;71
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Rswlrq/ Mrxuqdo ri Ilqdqfldo Hfrqrplfv/ 75/ 58:5;:1
Elggoh/ J1 F1/ J1 V1 Vhrz/ dqg D1 I1 Vlhjho +4<<8,= Uhodwlyh yhuvxv Lqfuhphqwdo
Lqirupdwlrq Frqwhqw/ Frqwhpsrudu| Dffrxqwlqj Uhvhdufk/ 45+4,/ 4571
Eloolqjv/ E1 +4<<<,= Uhylvlwlqj wkh Uhodwlrq Ehwzhhq wkh Ghidxow Ulvn ri Ghew dqg wkh
Hduqlqjv Uhvsrqvh Frh!flhqw/ Dffrxqwlqj Uhylhz/ :7+7,/ 83<8551

65

Eodfn/ I1/ dqg M1 Fr{ +4<:9,= Ydoxlqj Frusrudwh Vhfxulwlhv= Vrph Hhfwv ri Erqg
Lqghqwxuh Surylvlrqv/ Mrxuqdo ri Ilqdqfh/ 64+5,/ 68469:1
Eodfn/ I1/ dqg P1 Vfkrohv +4<:6,= Wkh Sulflqj ri Rswlrqv dqg Frusrudwh Oldelolwlhv/
Mrxuqdo ri Srolwlfdo Hfrqrp|/ :/ 96:871
Eoxp/ P1 +4<:7,= Idlolqj Frpsdq| Glvfulplqdqw Dqdo|vlv/ Mrxuqdo ri Dffrxqwlqj Uh0
vhdufk/ 46/ 4581
Exujvwdkohu/ G1/ M1 Mldpedoyr/ dqg H1 Qruhhq +4<;<,= Fkdqjhv lq wkh Suredelolw|
ri Edqnuxswf| dqg Htxlw| Ydoxh/ Mrxuqdo ri Dffrxqwlqj dqg Hfrqrplfv/ 44/ 53:571
Fkdulwrx/ D1/ dqg O1 Wuljhrujlv +5333,= Rswlrq0Edvhg Edqnuxswf| Suhglfwlrq/ Xql0
yhuvlw| ri F|suxv Zrunlqj Sdshu1
Fkulvv/ Q1 +4<<:,= Eodfn0Vfkrohv dqg Eh|rqg= Rswlrq Sulflqj Prghov1 PfJudz0Kloo/ Qhz
\run/ Q\1
Fruh/ M1/ dqg F1 Vfkudqg +4<<<,= Wkh Hhfw ri Dffrxqwlqj0Edvhg Ghew Fryhqdqwv rq
Htxlw| Ydoxdwlrq/ Mrxuqdo ri Dffrxqwlqj dqg Hfrqrplfv/ 5:+4,/ 4671
Gdperohqd/ L1/ dqg V1 Nkrxu| +4<;3,= Udwlr Vwdelolw| dqg Frusrudwh Idloxuh/ Mrxuqdo
ri Ilqdqfh/ 68+7,/ 434:591
Ghfkrz/ S1 +4<<7,= Dffrxqwlqj Hduqlqjv dqg Fdvk Iorzv dv Phdvxuhv ri Ilup Shuiru0
pdqfh= Wkh Uroh ri Dffrxqwlqj Dffuxdov/ Mrxuqdo ri Dffrxqwlqj dqg Hfrqrplfv/ 4;+4,/
6751
Ghodqh|/ N1 +4<<5,= Vwudwhjlf Edqnuxswf|1 Xqlyhuvlw| ri Fdoliruqld Suhvv/ Ehunhoh|/ FD1
Gkdolzdo/ G1/ N1 Ohh/ dqg Q1 Idujkhu +4<<5,= Wkh Dvvrfldwlrq Ehwzhhq Xqh{shfwhg
Hduqlqjv dqg Deqrupdo Vhfxulw| Uhwxuqv lq wkh Suhvhqfh ri Ilqdqfldo Ohyhudjh/ Frq0
whpsrudu| Dffrxqwlqj Uhvhdufk/ ;/ 53741
Gkdolzdo/ G1/ dqg V1 Uh|qrogv +4<<7,= Wkh Hhfw ri wkh Ghidxow Ulvn ri Ghew rq wkh
Hduqlqjv Uhvsrqvh Frh!flhqw/ Dffrxqwqj Uhylhz/ 9<+5,/ 74574<1
Glfkhy/ L1 +4<<;,= Lv wkh Ulvn ri Edqnuxswf| d V|vwhpdwlf UlvnB/ Mrxuqdo ri Ilqdqfh/
OLLL +6,/ 44647:1
Gxiilh/ G1/ dqg G1 Odqgr +5334,= Whup Vwuxfwxuhv ri Fuhglw Vsuhdgv zlwk Lqfrpsohwh
Dffrxqwlqj Lqirupdwlrq/ Hfrqrphwulfd/ 9<+6,/ 9669971
Idpd/ H1/ dqg N1 Iuhqfk +4<<5,= Wkh Furvv0Vhfwlrq ri H{shfwhg Vwrfn Uhwxuqv/ Mrxu0
qdo ri Ilqdqfh/ 7:+5,/ 75:7981
4<61

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66

Iudqflv/ M1 +4<<3,= Frusrudwh Frpsoldqfh zlwk Ghew Fryhqdqwv/ Mrxuqdo ri Dffrxqwlqj

Uhvhdufk/ 5;/ 65967:1
Jhvnh/ U1 +4<::,= Wkh Ydoxdwlrq ri Frusrudwh Oldelolwlhv dv Frpsrxqg Rswlrqv/ Mrxuqdo
ri Ilqdqfldo dqg Txdqwlwdwlyh Dqdo|vlv/ ss1 8748851
Juliihq/ M1/ dqg P1 Ohpprq +5335,= Errn0wr0Pdunhw Htxlw|/ Glvwuhvv Ulvn/ dqg Vwrfn
Uhwxuqv/ Mrxuqdo ri Ilqdqfh/ iruwkfrplqj1
Kdq/ E1/ U1 Mhqqlqjv/ dqg M1 Qrho +4<<5,= Frppxqlfdwlrq ri Qrqhduqlqjv Lqirupdwlrq
dw wkh Ilqdqfldo Vwdwhphqwv Uhohdvh Gdwh/ Mrxuqdo ri Dffrxqwlqj dqg Hfrqrplfv/ 48/ 96
;91
Kduw}hoo/ M1/ P1 Shfn/ dqg H1 Dowpdq +4<<8,= Hphujlqj Pdunhwv Frusrudwh Erqgv 0
D Vfrulqj V|vwhp1 Vdorprq Eurwkhuv/ Lqf1/ Qhz \run/ Q\1
Kxehu/ S1 +4<9:,= Wkh Ehkdylru ri Pd{lpxp Olnholkrrg Hvwlpdwhv xqghu Qrq0Vwdqgdug
Frqglwlrqv/ lq Surfhhglqjv ri wkh Iliwk Ehunhoh| V|psrvlxp lq Pdwkhpdwlfdo Vwdwlvwlfv
dqg Suredelolw|/ ss1 554566/ Ehunhoh|/ FD1 Xqlyhuvlw| ri Fdoliruqld Suhvv1
Kxoo/ M1 +5333,= Rswlrqv/ Ixwxuhv/dqg Rwkhu Ghulydwlyhv1 Suhqwlfh Kdoo/ Xsshu Vdggoh Ulyhu/
QM/ irxuwk hgq1
Mrqhv/ I1 +4<;:,= Fxuuhqw Whfkqltxhv lq Edqnuxswf| Suhglfwlrq/ Mrxuqdo ri Dffrxqwlqj
Olwhudwxuh/ 9/ 464971
Nhdokrihu/ V1/ V1 Nzrn/ dqg Z1 Zhqj +4<<;,= Xvhv dqg Dexvhv ri Erqg Ghidxow
Udwhv/ NPY Frusrudwlrq1
Ohodqg/ K1/ dqg N1 Wriw +4<<9,= Rswlpdo Fdslwdo Vwuxfwxuh/ Hqgrjhqrxv Edqnuxswf|/
dqg wkh Whup Vwuxfwxuh ri Fuhglw Vsuhdgv/ Mrxuqdo ri Ilqdqfh/ 84+6,/ <;:434<1
Or/ D1 +4<;9,= Orjlw yhuvxv Glvfulplqdqw Dqdo|vlv= D Vshflfdwlrq Whvw dqg Dssolfdwlrq
wr Frusrudwh Edqnuxswflhv/ Mrxuqdo ri Hfrqrphwulfv/ 64/ 484:;1
Pdjhh/ U1 +4<:7,= Lqgxvwu|0Zlgh Frpprqdolwlhv lq Hduqlqjv/ Mrxuqdo ri Dffrxqwlqj
Uhvhdufk/ 45+5,/ 5:35;:1
Pdudlv/ P1/ M1 Sdwhoo/ dqg P1 Zroivrq +4<;7,= Wkh H{shulphqwdo Ghvljq ri Fodv0
vlfdwlrq Prghov= Dq Dssolfdwlrq ri Uhfxuvlyh Sduwlwlrqlqj dqg Errwvwudsslqj wr Frp0
phufldo Edqn Ordq Fodvvlfdwlrqv/ Mrxuqdo ri Dffrxqwlqj Uhvhdufk/ 55 +Vxssohphqw,/
;:4471
Phuwrq/ U1 +4<:7,= Rq wkh Sulflqj ri Frusrudwh Ghew= Wkh Ulvn Vwuxfwxuh ri Lqwhuhvw
Udwhv/ Mrxuqdo ri Ilqdqfh/ 5</ 77<:31

67

Rkovrq/ M1 +4<;3,= Ilqdqfldo Udwlrv dqg wkh Suredelolvwlf Suhglfwlrq ri Edqnuxswf|/

Mrxuqdo ri Dffrxqwlqj Uhvhdufk/ 4</ 43<4641
Rsohu/ W1/ dqg V1 Wlwpdq +4<<7,= Ilqdqfldo Glvwuhvv dqg Frusrudwh Shuirupdqfh/
Mrxuqdo ri Ilqdqfh/ 7<+6,/ 434843731
Sdohsx/ N1 +4<;9,= Suhglfwlqj Wdnhryhu Wdujhwv= D Phwkrgrorjlfdo dqg Hpslulfdo Dqdo0
|vlv/ Mrxuqdo ri Dffrxqwlqj dqg Hfrqrplfv/ ;/ 6681
Slqfkhv/ J1/ dqg N1 Plqjr +4<:6,= D Pxolwyduldwh Dqdo|vlv ri Lqgxvwuldo Erqg Udwlqjv/
Mrxuqdo ri Ilqdqfh/ ss1 44;1
Sodww/ K1/ dqg P1 Sodww +4<<3,= Ghyhorsphqw ri d Fodvv ri Vwdeoh Suhglfwlyh Yduldeohv=
Wkh Fdvh ri Edqnuxswf| Suhglfwlrq/ Mrxuqdo ri Exvlqhvv/ Ilqdqfh/ dqg Dffrxqwlqj/ 4:+4,/
64841
+4<<4,= D Qrwh rq wkh Xvh ri Lqgxvwu|0Uhodwlyh Udwlrv lq Edqnuxswf| Suhglfwlrq/
Mrxuqdo ri Edqnlqj dqg Ilqdqfh/ 48/ 44;644<71
Urjhuv/ Z1 +4<<6,= Uhjuhvvlrq Vwdqgdug Huuruv lq Foxvwhuhg Vdpsohv/ Vwdwd Whfkqlfdo
Exoohwlq/ 46/ ;;<71
Vdqwrphur/ D1/ dqg M1 Ylqvr +4<::,= Hvwlpdwlqj wkh Suredelolw| ri Idloxuh iru Frp0
phufldo Edqnv dqg wkh Edqnlqj V|vwhp/ Mrxuqdo ri Edqnlqj dqg Ilqdqfh/ 41
Vkdush/ Z1 +4<;5,= Idfwruv lq Qhz \run Vwrfn H{fkdqjh Vhfxulw| Uhwxuqv/ Mrxuqdo ri
Sruwirolr Pdqdjhphqw/ ;+7,/ 84<1
Vkxpzd|/ W1 +4<<9,= Wkh Suhplxp iru Ghidxow Ulvn lq Vwrfn Uhwxuqv/ Sk1G1 wkhvlv/
Xqlyhuvlw| ri Fklfdjr1
+5334,= Iruhfdvwlqj Edqnuxswf| Pruh Dffxudwho|= D Vlpsoh Kd}dug Prgho/
Mrxuqdo ri Exvlqhvv/ :7+4,/ 4344571
Vwrqh/ P1 +4<<4,= Ilup Ilqdqfldo Vwuhvv dqg Shqvlrq Sodq Frqwlqxdwlrq2Uhsodfhphqw
Ghflvlrqv/ Mrxuqdo ri Dffrxqwlqj dqg Sxeolf Srolf|/ 43/ 4:85391
Vxeudpdq|dp/ N1/ dqg M1 Zlog +4<<9,= Wkh Jrlqj Frqfhuq Dvvxpswlrq dqg wkh Lq0
irupdwlyhqhvv ri Hduqlqjv/ Frqwhpsrudu| Dffrxqwlqj Uhvhdufk/ 46/ 5845:71
Yxrqj/ T1 +4<;<,= Olnholkrrg Udwlr Whvwv iru Prgho Vhohfwlrq dqg Qrq0Qhvwhg K|srwkh0
vhv/ Hfrqrphwulfd/ 8:+5,/ 63:6661
Zklwh/ K1 +4<;3,= D Khwhurvnhgdvwlflw|0Frqvlvwhqw Fryduldqfh Pdwul{ Hvwlpdwru dqg d
Gluhfw Whvw iru Khwhurvnhgdvwlflw|/ Hfrqrphwulfd/ 7;/ ;4:;6;1
]plmhzvnl/ P1 +4<;7,= Phwkrgrorjlfdo Lvvxhv Uhodwhg wr wkh Hvwlpdwlrq ri Ilqdqfldo
Glvwuhvv Suhglfwlrq Prghov/ Mrxuqdo ri Dffrxqwlqj Uhvhdufk/ Vxssohphqw/ 8<;91
68

Table 1: Sample Description

Panel A: Year-By-Year Bankruptcy Patterns

Year

Number of
Firms

Number of
Bankruptcies

% Firms
Failed

1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
Total

2,812
2,816
2,895
3,015
3,266
3,333
3,308
3,473
3,524
3,374
3,255
3,211
3,299
3,423
3,786
3,987
4,157
4,554
4,472
65,960

19
21
25
17
37
49
35
32
34
34
38
27
16
23
17
19
18
24
31
516

0.68%
0.75%
0.86%
0.56%
1.13%
1.47%
1.06%
0.92%
0.96%
1.01%
1.17%
0.84%
0.48%
0.67%
0.45%
0.48%
0.43%
0.53%
0.69%
0.78%

36

Panel B: Industry Bankruptcy Patterns - Fama-French (1997) Classifications

Industry
Aerospace
Agriculture
Automobiles
Beer
Building Materials
Books
Boxes
Business Services
Chemicals
Chips
Clothing
Construction
Coal
Computers
Drugs
Elec. Equipment
Energy
Fabricated Products
Food
Leisure
Gold
Guns
Health
Households
Lab Equipment
Machinery
Restaurants
Medical Equipment
Mines
Miscellaneous
Paper
Personal Services
Retail
Rubber
Shipping
Tobacco
Beverages, not beer
Steel
Telcommunications
Toys
Transportation
Textiles
Utilities
Wholesalers
Total

Number Number
% Firmof
of
Bankruptcies Years
Firm-Years Firms
Failed
415
286
1,157
255
2,137
784
264
5,785
1,324
4,080
1,127
683
95
3,258
2,250
1,105
3,880
509
1,597
1,227
606
101
1,187
1,681
1,759
2,842
1,393
2,142
441
671
1,372
618
3,886
967
140
82
124
1,322
1,553
738
1,825
695
4,121
3,476
65,960

53
59
176
39
278
103
44
1,230
179
613
190
121
21
619
428
155
664
67
219
258
93
12
270
240
265
405
278
406
57
130
163
128
688
144
24
14
23
177
334
143
314
105
366
575
10,870

1
0
11
0
10
3
0
21
5
20
17
12
5
47
3
8
45
3
9
8
6
0
8
12
8
11
21
8
2
2
6
7
79
4
4
0
0
11
11
8
29
10
8
33
516

0.24%
0.00%
0.95%
0.00%
0.47%
0.38%
0.00%
0.36%
0.38%
0.49%
1.51%
1.76%
5.26%
1.44%
0.13%
0.72%
1.16%
0.59%
0.56%
0.65%
0.99%
0.00%
0.67%
0.71%
0.45%
0.39%
1.51%
0.37%
0.45%
0.30%
0.44%
1.13%
2.03%
0.41%
2.86%
0.00%
0.00%
0.83%
0.71%
1.08%
1.59%
1.44%
0.19%
0.95%
0.78%
37

% of
Firms
Failed
1.89%
0.00%
6.25%
0.00%
3.60%
2.91%
0.00%
1.71%
2.79%
3.26%
8.95%
9.92%
23.81%
7.59%
0.70%
5.16%
6.78%
4.48%
4.11%
3.10%
6.45%
0.00%
2.96%
5.00%
3.02%
2.72%
7.55%
1.97%
3.51%
1.54%
3.68%
5.47%
11.48%
2.78%
16.67%
0.00%
0.00%
6.21%
3.29%
5.59%
9.24%
9.52%
2.19%
5.74%
4.75%

Table 2: Comparison of Altman's (1968) and Ohlson's (1980) Results

The dependent variable is bankruptcy in the 4 to 16 months following the fiscal year-end.
Based on 65,960 non-bankrupt firm-years and 516 bankrupt firm-years

Altman's
(1968)
Model
Constant
WC/TA
RE/TA
EBIT/TA
VE /TL
S/TA

Original
Revised
Parameter Parameter
Valuesa Estimatesb
-4.285*
-0.120
-0.44***
-0.014
0.101
-0.033
-0.813*
-0.006
-0.335*
-0.999
0.132*

-2 Log Likelihood
Wald 2
2

Pseudo-R
Observations

5,634
49.4
0.07
65,960

Ohlson's
(1980)
Model
Constant
Size
TL/TA
WC/TA
CL/CA
NI/TA
FFO/TL
INTWO
OENEG
CHIN

Original Revised
Parameter Parameter
Estimates Estimates
-1.320
-5.300*
-0.407*
-0.062*
6.030*
0.677*
-1.430** -0.869*
0.076
-0.123*
-2.370** 0.818*
-1.830*
0.485*
0.285
0.005
-1.720*
1.404*
-0.521*
-1.060*

-2 Log Likelihood
Wald 2
2

Pseudo-R
Observations

Altman does not report the significance levels of individual variables.

Revised parameters are estimated using a discrete hazard model.

WC/TA is working capital divided by total assets.

RE/TA is retained earnings divided by total assets.
EBIT/TA is earnings before interest and taxes divided by total assets.
VE /TL is market value of equity divided by total liabilities.
Size is the ln(Total Assets/GDP price level index).
TL/TA is total liabilities divided by total assets.
CL/CA is current liabilities divided by current assets.
OENEG is one if owners' equity is negative, zero otherwise.
NI/TA is net ncome divided by total assets.
FFO/TL is pre-tax income plus depreciation and amortization divided by total liabilities.
INTWO is one if Net Income was negative for the last two years, zero otherwise.
CHIN is (NIt-NIt-1)/(|NIt|+|NIt-1|) is the scaled change in net income.
*
significant at 1% or lower (two-sided test)
** significant at 5% or lower (two-sided test)
*** significant at 10% or lower (two-sided test)

38

5,370
735.1
0.11
65,960

Table 3: Descriptive Statistics

Based on 65,960 non-bankrupt firm-years and 516 bankrupt firm-years

Variable
BankRate
BSM-PB(0,r)
BSM-PB(0,)
BSM-PB(D,r)
BSM-PB(D,)
Z-Score
Z-Score(n)
O-Score
O-Score(n)
ExRet
Rsize

Status
Solvent
Bankrupt
Solvent
Bankrupt
Solvent
Bankrupt
Solvent
Bankrupt
Solvent
Bankrupt
Solvent
Bankrupt
Solvent
Bankrupt
Solvent
Bankrupt
Solvent
Bankrupt
Solvent
Bankrupt
Solvent
Bankrupt

Mean Std Dev

0.003
0.007
0.003
0.008 *
0.023
0.071
0.080
0.060 *
0.052
0.151
0.338 *
0.362
0.106
0.266
0.329
0.213 *
0.134
0.292
0.448 *
0.402
1.350
0.999
1.469 *
1.154
0.008
0.012
0.017 *
0.022
-0.813
8.906
2.915 *
3.782
0.008
0.015
0.025 *
0.033
0.075
0.607
-0.359 *
0.743
0.184
1.060
0.013 *
0.041

1%
99%
Median Percentile Percentile
0.006
0.003
0.011
0.008 * 0.003
0.011
0.000
0.000
0.357
0.025 * 0.000
0.354
0.000
0.000
0.888
0.187 * 0.000
1.000
0.000
0.000
1.000
0.063 * 0.000
1.000
0.000
0.000
1.000
0.309 * 0.000
1.000
1.222
0.051
4.771
1.300 * 0.016
5.483
0.008
0.000
0.022
0.014 * 0.000
0.058
-1.304
-8.382
12.796
2.212 * -2.778
16.796
0.004
0.001
0.053
0.015 * 0.001
0.162
0.029
-1.189
1.850
-0.370 * -2.139
1.713
0.016
0.000
2.857
0.004 * 0.000
0.137

* significantly different from the non-bankrupt firms at 1% or lower

t- test for test of means, Wilcoxon rank-sum test for test of medians
BankRate is the economy-wide rate of corporate bankruptcies among publicly-traded firms over the past 12 months.
BSM-PB (0, r) is BSM-PB assuming dividend rate = 0 and asset growth rate = risk-free rate.
BSM-PB (0, ) is BSM-PB assuming dividend rate = 0 and asset growth rate = Adjusted ROAt-1.
BSM-PB (D, r) is BSM-PB assuming dividend rate = Dt-1 and asset growth rate = risk-free rate.
BSM-PB (D, ) is BSM-PB assuming dividend rate = Dt-1 and asset growth rate = Adjusted ROAt-1.
Z-score is derived using the variables and parameter estimates of Altman (1968).
Z-score(n) is derived from the variables used by Altman (1968), estimated using a discrete hazard model.
O-Score is derived using the variables and parameter estimates of Ohlson (1980).
O-score(n) is the fitted probability of bankruptcy based on Ohlson (1980) estimated using a discrete hazard model.
ExRet is the firm's total return in year t-1 minus the value-weighted return of the NYSE/AMEX/NASDAQ index in year t-1.
Rsize is the logarithm of each firm's market capitalization measured at the beginning of the observation year,
relative to the total capitalization of the firms in our sample.
39

Table 4: Pearson Correlation Matrix

Based on 65,960 non-bankrupt firm-years and 516 bankrupt firm-years
Correlations greater than .20 in absolute magnitude are bolded.
Variable

Bankrupt BankRate BSM-PB(0, r) BSM-PB(0, ) BSM-PB(D, r) BSM-PB(D, )

Z-Score

Z-Score(n)

O-Score

O-Score(n)

ExRet

Bankrupt

1.00

BankRate

0.03*

1.00

BSM-PB(0,r)

0.05*

-0.08*

1.00

BSM-PB(0,)

0.16*

-0.01*

0.66*

1.00

BSM-PB(D,r)

0.04*

0.02*

0.34*

0.29*

1.00

BSM-PB(D,)

0.09*

0.03*

0.40*

0.56*

0.92*

1.00

Z-Score

0.01*

0.01*

-0.02*

-0.04*

0.00

-0.01*

Z-Score(n)

0.06*

0.03*

0.11*

0.27*

0.06*

0.14*

0.07*

1.00

O-Score

0.04*

0.01*

0.13*

0.24*

0.10*

0.17*

-0.03*

0.26*

1.00

O-Score(n)

0.10*

0.02*

0.18*

0.44*

0.14*

0.28*

-0.05*

0.25*

0.22*

1.00

ExRet

-0.06*

-0.08*

0.37*

0.06*

0.08*

0.02*

0.06*

-0.08*

-0.01*

-0.06*

1.00

Rsize

-0.01*

0.02*

-0.06*

-0.06*

-0.07*

-0.08*

-0.03*

-0.01*

-0.04*

-0.05*

0.00

1.00

Bankrupt is a Chapter 7 or 11 bankruptcy filing in the 4 to 16 months following the fiscal year-end.
BankRate is the economy-wide rate of corporate bankruptcies among publicly-traded firms over the past 12 months.
Z-score is derived using the variables and parameter estimates of Altman (1968).
Z-score(n) is derived from the variables used by Altman (1968), estimated using a discrete hazard model.
O-Score is derived using the variables and parameter estimates of Ohlson (1980).
O-score(n) is the fitted probability of bankruptcy based on Ohlson (1980) estimated using a discrete hazard model.
BSM-PB (0, r) is BSM-PB assuming dividend rate = 0 and asset growth rate = risk-free rate.
BSM-PB (0, m) is BSM-PB assuming dividend rate = 0 and asset growth rate = Adjusted ROAt-1.
BSM-PB (D, r) is BSM-PB assuming dividend rate = Dt-1 and asset growth rate = risk-free rate.
BSM-PB (D, m) is BSM-PB assuming dividend rate = Dt-1 and asset growth rate = Adjusted ROAt-1.
ExRet is the firm's total return in year t-1 minus the value-weighted return of the NYSE/AMEX/NASDAQ index in year t-1.
Rsize is the logarithm of each firm's market capitalization measured at the beginning of the observation year, relative to the total capitalization of the firms in our sample.
* significant at 1% or lower (two-sided test)

40

Rsize

1.00

Table 5: Comparison of BSM-PB Estimates

Based on discrete hazard model with Huber-White standard errors to control for firm dependence.
The dependent variable is bankruptcy in the 4 to 16 months following the fiscal year-end.

Constant
BankRate
BSM-PB (0,r)
BSM-PB (0,)
BSM-PB (D,r)
BSM-PB (D,)
-2 Log Likelihood
Wald

2
2

Pseudo-R
Observations

Dividend = 0
Growth = r
-6.05*
149.45*
3.74*

Dividend = 0
Growth =
-6.28*
125.90*

Dividend = D
Growth = r
-5.92*
129.61*

Dividend = D
Growth =
-6.23*
117.76*

3.60*
1.01*
2.05*
5,885

5,300

5,916

5,606

282

1,212

145

558

0.02
65,960

0.12
65,960

0.02
65,960

0.07
65,960

BSM-PB (0, r) is BSM-PB assuming dividend rate = 0 and asset growth rate = risk-free rate.
BSM-PB (0, ) is BSM-PB assuming dividend rate = 0 and asset growth rate = Adjusted ROAt-1.
BSM-PB (D, r) is BSM-PB assuming dividend rate = Dt-1 and asset growth rate = risk-free rate.
BSM-PB (D, ) is BSM-PB assuming dividend rate = Dt-1 and asset growth rate = Adjusted ROAt-1.
* significant at 1% or lower (two-sided test)

41

Table 6: Relative Information Content Tests

Based on discrete hazard model with Huber-White standard errors to control for firm dependence.
The dependent variable is bankruptcy in the 4 to 16 months following the fiscal year-end.

Constant
BankRate
Z-Score
Z-Score(n)
O-Score
O-Score(n)
BSM-PB

Z-Score Z-Score(n) O-Score O-Score(n) BSM-PB

-5.89*
-5.85*
-5.79*
-5.99*
-6.28*
133.28* 133.40* 132.77* 139.40* 125.90*
0.07*
5.91*
0.01***
13.05*
3.60*

-2 Log Likelihood 5,970

Wald

2
2

Pseudo-R
Observations

5,939

5,963

5,835

5,300

73

80

59

83

1,212

0.01
65,960

0.02
65,960

0.01
65,960

0.03
65,960

0.12
65,960

BankRate is the economy-wide rate of corporate bankruptcies among publicly-traded firms

over the past 12 months.
Z-score is derived using the variables and parameter estimates of Altman (1968).
Z-score(n) is derived from the variables used by Altman (1968) estimated using a discrete
hazard model.
O-Score is derived using the variables and parameter estimates of Ohlson (1980).
O-score(n) is the fitted probability of bankruptcy based on Ohlson (1980) estimated using a
discrete hazard model.
BSM-PB is BSM-PB assuming dividend rate = 0 and asset growth rate = Adjusted ROAt-1.
* significant at 1% or lower (two-sided test)
** significant at 5% or lower (two-sided test)
*** significant at 10% or lower (two-sided test)

42

Table 7: The Contribution of Changes

Based on discrete hazard model with Huber-White standard errors to control for firm dependence.
The dependent variable is bankruptcy in the 4 to 16 months following the fiscal year-end.

Panel A: Levels and Changes Models

Constant
BankRate
Z-Scoret-1
Z-Score
Z-Score(n)t-1

Z-Score
-5.91*
126.59*
0.10*
0.09*

Z-Score(n)
-5.88*
126.84*

O-Score
-5.76*
125.62*

BSM-PB
-6.34*
126.24*

11.85*

Z-Score(n)
O-Scoret-1
-Score
O-Score(n)t-1

5.55*#
0.01
0.01
21.84*

-Score(n)
BSM-PBt-1
BSM-PB
-2 Log Likelihood
Wald 2
Pseudo-R2
Observations

O-Score(n)
-6.05*
132.76*

16.12*#
3.79*
3.55*
4,791
55
0.01
53,501

4,760
72
0.02
53,501

4,781
44
0.01
53,501

4,635
77
0.04
53,501

4,227
1,027
0.12
53,501

Panel B: Vuong Tests

z -statistic
Z-Scoret-1 and change
Z-Score(n)t-1 and change
O-Scoret-1 and change
O-Score(n)t-1 and change

versus
versus
versus
versus

Z-Score alone
Z-Score(n) alone
O-Score alone
O-Score(n) alone

210*
148*
133*
127*

Z-Score - level and change

Z-Score(n) - level and change

versus
versus

BSM-PB alone
BSM-PB alone

-118*
-120*

O-Score - level and change

versus

BSM-PB alone

-124*

O-Score(n) - level and change

versus

BSM-PB alone

-107*

BSM-PB alone results are those displayed in the last column of Table 6.
Positive z -statistic indicates that the left-hand variables provide relatively more information.
Negative z -statistic indicates that the right-hand variables provide relatively more information.

*
significant at 1% or lower (two-sided test)
** significant at 5% or lower (two-sided test)
*** significant at 10% or lower (two-sided test)
#

coefficient on change variable is significantly different from that on a level variable at 1% of lower (two-sided test)

43

Table 8: The Contribution of Industry Adjustments

Based on discrete hazard model with Huber-White standard errors to control for firm dependence.
The dependent variable is bankruptcy in the 4 to 16 months following the fiscal year-end.

Panel A: Industry Means and Deviations

Constant
BankRate
IM(Z-Score)
ID(Z-Score)
IM(Z-Score(n))
ID(Z-Score(n))
IM(O-Score)
ID(O-Score)
IM(O-Score(n))
ID(O-Score(n))
IM(BSM-PB)
ID(BSM-PB)
-2 Log Likelihood
Wald 2
Pseudo-R2
Observations

Z-Score
-6.76*
133.67*
0.67*
-0.05#

Z-Score(n)
-6.95*
132.01*

O-Score
-5.86*
132.06*

O-Score(n)
-6.33*
139.94*

BSM-PB
-6.28*
125.90*

142.67*
5.73*#
-0.09***
0.01***##
55.64**
12.75*###
3.66**
3.60*
5,921
115
0.02
65,960

5,907
123
0.02
65,960

5,960
65
0.01
65,960

5,833
89
0.03
65,960

5,326
1,214
0.12
65,960

The industry mean of a variable based on the Fama and French (1992) industry classification system.
The deviation from the industry mean based on the Fama and French (1992) industry classification system.

Panel B: Vuong Tests

Z-Score - industry mean and deviation
Z-Score(n) - industry mean and deviation
O-Score - industry mean and deviation
O-Score(n) - industry mean and deviation
Z-Score - industry mean and deviation
Z-Score(n) - industry mean and deviation
O-Score - industry mean and deviation
O-Score(n) - industry mean and deviation

versus
versus
versus
versus
versus
versus
versus
versus

Z-Score alone
Z-Score(n) alone
O-Score alone
O-Score(n) alone
BSM-PB alonea
BSM-PB alonea
BSM-PB alonea
BSM-PB alonea

z -statistic
41*
34*
9*
12*
-112*
-118*
-143*
-118*

BSM-PB alone results are those displayed in the last column of Table 6.
Positive z -statistic indicates that the left-hand variables provide relatively more information.
Negative z -statistic indicates that the right-hand variables provide relatively more information.

*
significant at 1% or lower (two-sided test)
** significant at 5% or lower (two-sided test)
*** significant at 10% or lower (two-sided test)
#

coefficient on change variable is significantly different from that on a level variable at 1% of lower (two-sided test)

##

coefficient on change variable is significantly different from that on a level variable at 5% of lower (two-sided test)

###

coefficient on change variable is significantly different from that on a level variable at 10% of lower (two-sided test)

44

Table 9: Incremental Information Tests

Based on discrete hazard model with Huber-White standard errors to control for firm dependence.
The dependent variable is bankruptcy in the 4 to 16 months following the fiscal year-end.

Variable
Constant
BankRate
Z-Score
Z-Score(n)
O-Score
O-Score(n)
BSM-PB
ExRet
Rsize
-2 Log Likelihood
Wald 2
Pseudo-R2
Observations

Column 1
-6.40*
125.1*
0.09*

Column 2
-6.30*
126.4*

Column 3
-5.76*
105.9*

-0.37
0.00
3.62*

3.11*
3.46*

5,291
1,306
0.12
65,960

5,291
1,215
0.12
65,960

2.87*
-0.61*
-9.63*
5,089
1,157
0.16
65,960

BankRate is the economy-wide rate of corporate bankruptcies among publicly-traded firms

over the past 12 months.
BSM-PB is BSM-PB assuming dividend rate = 0 and asset growth rate = Adjusted ROAt-1.
Z-score is derived using the variables and parameter estimates of Altman (1968).
Z-score(n) is derived from the variables used by Altman (1968) estimated using a discrete
hazard model.
O-Score is derived using the variables and parameter estimates of Ohlson (1980).
O-score(n) is the fitted probability of bankruptcy based on Ohlson (1980) estimated using a
discrete hazard model.
ExRet is the firm's total return in year t-1 minus the value-weighted return of the
NYSE/AMEX/NASDAQ index in year t-1.
Rsize is the logarithm of each firm's market capitalization measured at the beginning of the
observation year, relative to the total capitalization of the firms in our sample.
* significant at 1% or lower (two-sided test)
** significant at 5% or lower (two-sided test)
*** significant at 10% or lower (two-sided test)

45