The Dynamic Z-Score

Abstract

This paper suggests that the time tested Altman Z-score, originally designed to predict corporate default represents considerable value when used as a corporate performance metric if measured continuously as opposed to one moment in time. Indeed, one could reason that if the measure has merit as a predictor of default, then it only make sense to manage the underlying drivers in order to optimize the ongoing viability of the firm. Used in this manner, this article argues that the Z-score should be considered more often in the corporate performance management setting. In addition, the article highlights the significance of the measure when crafting loan covenants to compliment other measures that are perhaps shorter term in nature. A generic framework is provided that illustrates the relationship of underlying drivers that contribute to the score, representing at least one approach to managing firm viability as a component of corporate strategy.