Models of Bankruptcy Prediction Since the Recent Financial Crisis: KMV, Naïve, and Altman’s Z- score

Abstract: Corporate bankruptcy prediction has become a popular research topic since 1960s, and default risk management plays a more significant role among investors, debtors and the lenders. The Altman’s z-score model, the KMV model, and the Naïve model are well-known and widely used bankruptcy prediction models. This paper focuses on examining the bankruptcy prediction accuracy of these three models in the U.S. market since the Financial Crisis from 2007 to 2012. After comparing each model’s performance, we find that the Naïve model has the best default prediction power in the whole industries. Since the financial industry includes high leveraged firms, pervious researches usually do not specifically analyze financial firms. After analyzing different industries, we find that KMV model has the best bankruptcy prediction power for all non-financial firms, while the Naïve is the most effective prediction model for financial firms. For all industries, we recommend to use the Naïve model to predict the default risks.