Altman Z-score

The Z-score formula for predicting bankruptcy was published in 1968 by Edward I. Altman, who was, at the time, an Assistant Professor of Finance at New York University.

Z-scores are used to predict corporate defaults and an easy-to-calculate control measure for the financial distress status of companies in academic studies.

The Z-score uses multiple corporate income and balance sheet values to measure the financial health of a company.

Altman applied the statistical method of discriminant analysis to a dataset of publicly held manufacturers.

had collected matched samples and assessed that various accounting ratios appeared to be valuable in predicting bankruptcy.

[citation needed] Altman Z-score is a customized version of the discriminant analysis technique of R. A. Fisher (1936).

William Beaver's work, published in 1966 and 1968, was the first to apply a statistical method, t-tests to predict bankruptcy for a pair-matched sample of firms.

Altman's primary improvement was to apply a statistical method, discriminant analysis, which could take into account multiple variables simultaneously.

But the crucial problem is to make an inference in the reverse direction, i.e., from ratios to failures.”[3] From about 1985 onwards, the Z-scores gained wide acceptance by auditors, management accountants, courts, and database systems used for loan evaluation (Eidleman).

The formula's approach has been used in a variety of contexts and countries, although it was designed originally for publicly held manufacturing companies with assets of more than $1 million.

Modern academic default and bankruptcy prediction models rely heavily on market-based data rather than the accounting ratios predominant in the Altman Z-score.