Reviewed by Ahmed El-Zayaty Northeastern Illinois University

This book is Altman’s doctoral thesis which was written in 1967 at University of California, Los Angeles. Quoting from the first chapter:
The purpose of this thesis is to investigate empirically the characteristics of bankrupt corporations and at¬tempt to develop an accurate bankruptcy predictive model through a multiple discriminant analysis tech¬nique using financial and economic ratios as the pre¬dictive variables. The analysis will be restricted to manufacturing corporations [p. 5].

In a typical dissertation style, the book contains seven un-even chapters and eight appendices. However, it is essentially composed of four parts:

Part I: A brief review of prior research using univariate ra-tio analysis as a technique for identifying and predicting corpo-rate financial difficulties.

Part II: A discussion of the shortcomings of the univariate approach and a presentation of the multiple discriminant analy-sis as more appropriate technique to capture the characteristics of bankrupt corporations.

Part III: A development of a discriminant function. Altman used a paired sample consisting of thirty-three pairs of manu-facturing firms, where industry and size were used as the pairing criteria, and twenty-two accounting and nonaccounting variables were considered in various combinations to explore the most efficient discriminant function. A five-variable dis-criminant model was identified as being the most accurate in discriminating the bankruptcy status of the sampled firms. This discriminant model was then validated in both a descriptive and a predictive sense. For the former, the selected model was used to classify the original sample from which the discriminant function was developed; the model correctly classified 94% of the cases. For the latter, the model was used to classify a sec-ondary (holdout) sample; the model correctly classified 96% of the cases.

Part IV: An analysis of the study results was presented, some implications of these results were discussed, and possible uses of the model were suggested such as business credit evalu¬ation, internal and external management considerations, and in¬vestment guidelines.

In evaluating the contribution of this book one should note that it was written more than two decades ago when researchers lacked the luxury of many of the research tools available today. Given the state of the art at that time, the bankruptcy prediction model developed in this book (thesis) is considered a pioneering attempt to an integrated approach for using financial ratios to identify the characteristics of a bankrupt company. In fact, Altman’s initiative has stimulated a whole line of research stud¬ies that used the multivariate analysis approach for evaluating the ability of several ratios (taken together) to assess the finan¬cial status of a firm.

Subsequent research studies have attempted to improve upon and extend Altman’s early work. Indeed, there are now numerous business failure prediction models available for re¬searchers and practitioners. Consequently, this book may be useful only from a historical perspective. It represents a turning point in the historical development of corporate bankruptcy prediction. It could be a valuable required reading for M.S. and Ph.D. business students. It gives not only a good example of the writing and analytical style of a Ph.D. thesis in the late sixties, but it also highlights the difference in analytical process of the univariate versus the multivariate approach to predict corporate bankruptcy.