Forty years ago, I developed a method of predicting bankruptcies by U.S.[public] companies that makes use of equity market values as well asfundamental financial and operating data. Since that time, my“Z-Score” model has become one of the most widely usedmethods for assessing the creditworthiness of manufacturing companiesthroughout the world. And it continues to be used by both financescholars and practitioners in a variety of ways, including credit anddebt analysis, investment decisions, merger and acquisition screens,audit-risk analysis, and receivables management. It has also been usedby corporate managers and their advisers when managing turnarounds ofdistressed companies. This article extends the use of bankruptcyprediction models to a new application: the assessment of the health ofindustrial companies as they emerge from the Chapter 11 bankruptcyprocess, including the probability that the companies will have to filefor bankruptcy again—the so-called “Chapter 22”phenomenon. Using a modified Z-Score model, I find significant economicdifferences between those companies that emerge from Ch. 11 and surviveas going concerns and those that later file again. In particular,companies that filed a second Chapter 11 had significantly higherleverage and lower profitability shortly after emerging the first time.The predictive ability of this modified Z-Score suggests it can be usedas a effective tool for evaluating the quality and efficacy of thebankruptcy reorganization plan.
