CORPORATE DISTRESS PREDICTION MODELS IN A TURBULENT ECONOMIC AND BASEL II ENVIRONMENT

Edward I. Altman

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Financial Distress and Bankruptcy Prediction Corporate Insolvency and Governance Credit Risk and Financial Regulations

Abstract

This paper discusses two of the primary motivating influences on the recent development/revisions of credit scoring models, - the important implications of Basel II's proposed capital requirements on credit assets and the enormous amounts and rates of defaults and bankruptcies in the United States in 2001-2002. Two of the more prominent credit scoring techniques, our Z-Score and KMV's EDF models, are reviewed. Both models are assessed with respect to default probabilities in general and in particular to the infamous Enron and WorldCom debacles in particular. In order to be effective, these and other credit risk models should be utilized by firms with a sincere credit risk culture, observant of the fact that they are best used as an additional tool, not the sole decision making criteria, in the credit and security analyst process.

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References

1968FINANCIAL RATIOS, DISCRIMINANT ANALYSIS AND THE PREDICTION OF CORPORATE BANKRUPTCY 1974ON THE PRICING OF CORPORATE DEBT: THE RISK STRUCTURE OF INTEREST RATES*1966Financial Ratios As Predictors of Failure 2001Forecasting Bankruptcy More Accurately: A Simple Hazard Model 1977ZETATM analysis A new model to identify bankruptcy risk of corporations 1989Measuring Corporate Bond Mortality and Performance 1992Credit risk measurement

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