The Altman ‘Z’ is “50” and Still Young: Bankruptcy Prediction and Stock Market Reaction due to Sudden Exogenous Shock

Abstract

This study is motivated by the continuing popularity of the Altman Z-score as a measure of distress risk. This study provides a hitherto unexplored perspective by examining the relation between stock market returns and the probability of bankruptcy during an unexpected sudden shock. Following the 9/11 attacks of 2001, the US stock market dropped dramatically. We find evidence that firms which had higher bankruptcy risk experienced greater negative returns following the attack. This study suggests that the Altman Z-score is useful in identifying firms with a higher distress risk and consequent larger negative stock returns in the event of an exogenous sudden shock.