Brattle Consultants Conduct an Empirical Analysis of Solvency Shortcut Measures in a Recent Article
Published in the ABI Journal
Corporate insolvency can be very difficult and time consuming to predict, so shortcut measures have become popular ways to asses the creditworthiness and risk of companies. In a recent ABI Journal article, Brattle Associates Nitin Bajaj and Dr. Adrienna Huffman and Principal David Plastino review various solvency shortcut measures –including the Altman Z-Score – and conduct an empirical analysis to assess the ability of these measures to predict future insolvency.
In their review, the authors found that – while bankruptcy shortcut measures are predictive of insolvency – no single measure is perfect, and the predictive power of the different methods is dependent on each company’s characteristics. Although the simplicity of using a single ratio or metric can be advantageous, analyzing multiple metrics as a best practice will likely lead to more robust predictions.
The full article, “Solvency Shortcuts: The Use and Misuse of Simple Tools for Predicting Financial Distress,” is available below.
