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  • Writer's pictureOne Hat Research LLC

One-Year Return is a Powerful Bankruptcy Predictor

Prior work demonstrates that neither Altman Z-score nor Merton distance-to-default predict bankruptcy in unbalanced datasets. I show that one-year stock returns are a powerful bankruptcy predictor. In U.S. public firms from December 31, 1995 through December 31, 2021 that are members of the Russell 3000 or (starting, December 31, 2005) the Russell Microcap indexes, a one-year return at or below minus 96 percent is associated with a bankruptcy filing frequency in the next year of greater than 37.9 percent. Just 7.7 percent of bankruptcies occur in the year following a calendar year with a positive return.

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