CHAPTER 10A 50‐Year Retrospective on Credit Risk Models, the Altman Z‐Score Family of Models, and Their Applications to Financial Markets and Managerial Strategies
THE EVOLUTION OF CORPORATE CREDIT SCORING SYSTEMS
Credit scoring systems for identifying determinants of a firm's repayment likelihood probably go back to the days of the Crusades – when travelers needed “loans” to finance their travels – and certainly were used much later in the United States as companies and entrepreneurs helped to grow the economy, especially in its westward expansion. Primitive financial information was usually evaluated by lending institutions in the 1800s with the primary types of information required being subjective, or qualitative in nature, revolving around ownership and management variables and collateral (see Figure 10.1). It was not until the early 1900s that rating agencies and some more financially oriented corporate entities, for example, the DuPont System of corporate ROE growth, introduced univariate accounting measures and industry peer‐group comparisons, with rating designations (Figure 10.2). The key aspect of these “revolutionary” techniques was the ability of the analyst to compare an individual corporate entity's financial performance metrics to a reference database of time‐series (same entity) and cross‐section (industry) data. Then, and as even more so today, data and databases were the key element for meaningful diagnostics. There is no doubt that in the credit scoring ...
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