Researchers for decades have developed complex models to predict corporate bankruptcies, including financial ratios and additional accounting information. The complexity was unnecessary. Simple market evidence shows that U.S. publicly-listed stocks sufficiently incorporate available information about catastrophic losses in bankruptcy. In an exploratory analysis, I show that prior one-year return and market leverage (the ratio of stock market capitalization to face value of debt) perform much better than the Altman Z-Score and as well as complex models, suggesting that more complex models using accounting information generate noise around informative market evidence. That is, the complexity offered by existing models of corporate bankruptcy prediction was unnecessarily complex.
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