Managers, stockholders, lenders and employees concern about their firm’s financial
condition. This shared interest creates continual inquiries and recurrent attempt to answer the
incessant question about how we predict financial distress or what reveals the credit risk of firms.
Despite numerous attempts for bankruptcy prediction and their application over three decades
after Altman (1968)’s seminal study, financial distress prediction research has not seemed to
reach an unequivocal conclusion. We investigated our postulations concerning Altman’s Z-score
and the option-based measure based on arguments that the Z-score should lose its significance
since its introduction due to some reasons.
Based on our results, we learned that Altman’s Z-score loses its significance as a
bankruptcy prediction measure due to two possible grounds; it loses its prediction power for
long-term prediction and it was not significance for recent years’ data. In addition, we found
that the option-based measure does provide significant results as a prediction measure for later
years. We believe that the reduction of prediction time span of Z-score and better performance of
the option-based measure implies that the more efficient market shortens the information
transition time in the market so that bankruptcy prediction should be based on immediate and
continuously changing information about the event and discrete or sporadic variables would
mislay the interpretation of information concerning bankruptcy.
Key words: Credit Risk Measure, Z-Score, Option, Default Prediction