A model of bankruptcy prediction

Early warning of nancial distress is vital for bankruptcy prediction and the study of bankruptcy risk became of main interest for the vari- ous stakeholders of the nancially distressed rms. This paper is a follow up of Altman (1968) Z-score, and more precisely a calibration for the Japanese setting. The motivation behind this study is that the model might deviate from the original observations due to the dierences. The rst dierence arises from the accounting and nancial divergences be- tween the two countries, and more specically between the US GAAP and JP GAAP (PriceWaterhouseCoopers, 2005). The second dierence is with respect to recent nancial developments, such as risk management tools, and dierences in corporate governance between the JP and US. In the development of the model, the same methodology as in the orig- inal model is followed. Firstly, the model is calibrated for a Japanese setting. Secondly, validation tests are performed in order to assess the reliability and predictability of the model. Finally, the empirical evidence shows support for the calibrated model. Furthermore, it is recommended that the model has to be used only under the nancial and accounting conditions of Japan.