Edward Altman American economist, professor of finance at New York University Date of Birth: 05.06.1941 Country: USA

Biography of Edward Altman

Edward Altman is an American economist and finance professor at New York University. He gained worldwide recognition after creating a mathematical formula that measures the degree of bankruptcy risk for individual companies, known as the Z score model. Altman's research involved analyzing data from stable firms and companies that later filed for bankruptcy within a five-year period. The Z score model was constructed using the framework of multiple-discriminant analysis (MDA). His goal was to differentiate firms that were not at risk of bankruptcy from those with a high probability of future insolvency.

The Altman Z-score is a function of various indicators that characterize a company's economic potential and its performance over a given period. The original Z score model for publicly traded companies was published by Altman in 1968. In 1983, he also released a model for privately held companies. The formulas for these models include different weightings for the following variables:

Z = 1.2x1 + 1.4x2 + 3.3x3 + 0.6x4 + 0.999x5 (for publicly traded companies)
Z = 0.717x1 + 0.847x2 + 3.107x3 + 0.42x4 + 0.995x5 (for privately held companies)

Where:
x1 - ratio of working capital to total assets
x2 - ratio of retained earnings to total assets
x3 - ratio of operating income to total assets
x4 - ratio of market value of equity to book value of total debt (for publicly traded companies)
x5 - ratio of net income to total assets

Altman's research led him to define three intervals based on the obtained results: one for publicly traded companies and another for privately held companies.

Throughout his career, Edward Altman has authored 25 books, including:

- "Corporate Financial Distress and Bankruptcy: Predict and Avoid Bankruptcy, Analyze and Invest in Distressed Debt"
- "Recovery Risk: The Next Challenge in Credit Risk Management"
- "The Handbook of Financial Modeling: A Practical Approach to Creating and Implementing Valuation Projection Models"

Altman's contributions to finance and his innovative bankruptcy prediction model have made a significant impact on the field, providing valuable insights for investors, creditors, and researchers alike.