The Altman Z Score Does Not Predict Bankruptcy

Abstract

The Altman Z Score (AZS) does not predict bankruptcy. The false positive rate of the AZS is 98%-99%. The AZS fails as a predictive model because it does not incorporate market evidence bearing on bankruptcy probability, specifically, returns, debt to an approximation of market value of assets, and stock price. In a probit model, AZS is statistically insignificant in the presence of these market variables.