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Strategies & Market Trends : Bankruptcy Predictor Model
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To: Bob Rudd who wrote (266)4/1/1999 12:15:00 PM
From: Q.  Read Replies (1) of 477
 
Bob, re. Ohlson's model:

the mysterious (2) you asked about isn't anything that belongs in the formula. It is a label to indicate that the formula is the second equation appearing in the paper. Probably the person who converted the paper to html format lost a tab that would otherwise make this number appear to be clearly separated from the rest of the equation.

When you see something like Ni(t) - Ni(t-1) , that is probably just a difference of the quantity Ni, between two consecutive years. Apparently the model includes not only the present state of the finances, but also the trend, which is something Altman doesn't do.

If you want to try to use that equation, there is one thing about it that isn't obviously clear: the Log function could be either a base-10 or a natural logarithm. From the context of the equation I would guess it is a natural logarithm, but I can't be sure.

It appears that unlike Altman, Ohlson's model doesn't include market cap. This suggests to me that it would be less useful than Altman's for looking at development stage companies. That's because the ability of a cash-burning co. with no operations to survive depends solely on its ability to sell more equity, and this is typically limited to about 20% of market cap per year.

The paper you linked to mentioned that Compustat gives a Z score for companies. Sometime I'll have to check that out. There's a Compustat link in the business college library down the street from where I work.
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