A comparison of Altman’s z-score and the J-model in assessing corporate failure: Evidence from the USA

Over the past decades, researchers developed different models predicting the bankruptcy of companies across the world. However, these models differ greatly in nature, impact and time scale. The rationale of this paper is to discuss a variety of bankruptcy prediction models and its differences. A deeper insight is given to two models using financial ratios. Altman’s z-score and the J-model are compared and analyzed using a sample of US companies. In this comparison it was concluded that the J-model is a better predictor of bankruptcy. A new model was established by adding a seventh variable, the debt ratio, to the original J-UK model, which was based on Altman’s z-score. The new model, the L-model of bankruptcy, gives a better prediction of companies that fall into the categories of bankrupt and non-bankrupt than Altman’s z-score and the J-model.