Can Operating Leases Predict Bankruptcy in Asset‐Intensive Firms? Public

http://ir.library.oregonstate.edu/concern/honors_college_theses/dz010v63x

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  • Since the Altman Z-score was published in 1968, the Z-score has been a common way that investors predict bankruptcy and value risk. However, corporate structure has evolved since 1968 due to changes in economic factors and financial reporting standards. In 1976, the FASB created the first bright-line rules to distinguish between operating and capital leases. The effect of these changes on the balance sheet is not accounted for in the Altman Z-score. My theory is that distressed companies begin favoring operating leases because the footnotes are not as closely analyzed as the financial statements. In the beginning of the study, I attempt to predict bankruptcy using the Z-score for an array of asset-intensive firms. I then bring the Z-score up to date by adjusting the Altman Z-score coefficients for my sample of asset-intensive firms from a more current period. The factors included in the model remain constant, but their weighting changes due to corporate structure evolving. Lastly, I propose a model that uses the original Z-score ratios but adds operating leases to improve accuracy of bankruptcy prediction.
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