Bridge over ocean
1 January 1985 Financial Analysts Journal Volume 41, Issue 1

Stock Market Behavior Around Bankruptcy Model Distress and Recovery Predictions

  1. Steven Katz
  2. Steven Lilien
  3. Bert Nelson

Trading strategies for earning abnormal returns may be developed by following signals of corporate distress or recovery. Using signals generated by two popular bankruptcy models—the Altman Z score model and the Wilcox X value model—the authors classified NYSE firms according to whether they were moving from health to distress or from distress to health.

For the 15-month period prior to the issuance of the annual report that triggered a shift in state, firms classified by the Altman model as recovering from distress displayed significant abnormal positive returns; those classified as deteriorating showed significant abnormal negative returns. Both groups continued to exhibit abnormal returns in the expected direction over the nine months following the announcement date. Using the Wilcox model as the discriminator of recovery, the authors found no abnormal return behavior before or after distress predictions but substantial anticipation of recovery signals.

Read the Complete Article in Financial Analysts Journal Financial Analysts Journal CFA Institute Member Content

We’re using cookies, but you can turn them off in Privacy Settings.  Otherwise, you are agreeing to our use of cookies.  Accepting cookies does not mean that we are collecting personal data. Learn more in our Privacy Policy.