Edward Altman Biography

Finance “Ask the employees”: how to predict the bankruptcy of the mood of employees and their attitude to the company is the best advanced indicator of its upcoming bankruptcy: it “works” long before the problems are visible to auditors and investors, and more precisely model forecasts based on financial data. It is ahead of the accuracy and speed of the forecast.

Standard indicators of the activities of firms that reflect financial statements or stock market were shown in the study by John Knopf and Kristina Lalova from the Business School of the University of Connecticut. Bankruptcy forecasting models, traditionally based on financial indicators and market indicators, for example, the dynamics of the profitability of shares and its volatility, are quite often mistaken, especially if the forecast horizon for more than a year, researchers note.

They decided to add non -standard - moods and emotions of employees to standard financial variables, having studied the data of more American companies and the reviews of their employees for - GG. It turned out that the model “with the emotions of employees” predicts bankruptcy more accurately, especially on the medium -term horizon for more than a year, on which the reliability of “ordinary” forecast methods is relatively low.

The predictive force of sensations in the city, following the invention of Altman, also appeared other models of bankruptcy forecasting, successfully used in risk management, see all of them based on financial indicators or a combination of financial indicators and market indicators. Bankruptcy forecasting are several basic models that allow you to predict the bankruptcy of companies.

In addition to the Altman model, two more of them, developed by American economists, James Olson G. In the city, many other models of calculating the probability of bankruptcy have appeared, including models based on machine training, but they are all based on the analysis of financial and market indicators. The model built by Knomphf and Lalova also includes a number of financial and market indicators of companies, but it is based on a change in the attitude of employees to the company.

This indicator, called by the authors the average indicator of employees' satisfaction, takes into account how for 12 years that covers the study, employees of the companies included in the sample evaluated: 1 their career opportunities; 2 salaries; 3 culture and values ​​of the company; 4 actions of her top management and 5 balance between personal life and work. To evaluate the satisfaction of employees, researchers used the data on the search for the work of GlassDoor, which allows you to learn from the anonymous reviews of former and current employees about the internal climate in companies.

In the profile of each company, the site indicates its assessment, the share of workers who are ready to recommend it to work for their friends, a rating of approval of the actions of the general director. From the database of bankruptcies of the School of the Law of the University of California at Los Angeles, containing information about all bankruptcies of American joint-stock companies from October of each of them, they picked up a successful “twin” company, which continues their activities from the same industry, close in terms of assets and BOK-to-MARKT ratio relations between the Balance value of the company to its market value.

Then the authors calculated the probability of bankruptcy of each of the firms on their own model and on four traditional - Altman, Olson, Zmievsky and Shamuay see the final step was a comparison of the actual bankruptcy with what each of the five models predicted on this score. The analysis showed that the model taking into account the employees with work was the most accurate in forecasts three and two years before the actual bankruptcy - just when traditional models still do this quite poorly, since at this stage the financial reporting and market indicators on which such models are based, at best, they only “hint” on the probable deterioration of the affairs of the company.

Altman himself in his fundamental work G. But if we include an indicator of employees' satisfaction in traditional models, their accuracy increased throughout the forecast horizon. The profitability of the “Portfolio of Reviews” website GlassDoor, which collects employees about companies about the G. according to the calculations of the economists of the GlassDoor, a hypothetical investmentport, assembled from shares of the best employers in equal shares to the city, investing in the city of the highest profitability were demonstrated by companies from the TOP BPTW, and on average the increase in 10 places in the ranking of the best Employers were associated with an increase in the annual yield of its shares by 1.7 p.

Similar results correspond to the growing number of academic research that finds the relationship between corporate culture and business efficiency, the compilers of the rating note. The probability of bankruptcy of the company is reduced as the average satisfaction of employees grows with its company - and increases when it is reduced.In addition, the level of satisfaction of employees in many respects predicts whether the company that has been on the verge of bankruptcy will be able to avoid it, the authors found it.

The fact is that employees begin to feel the deterioration of the state of the company's affairs faster than the auditors who approve the reporting, and investors investing in the company’s shares, explain the researchers. It affects the attitude of employees to the decisions of the leadership, the assessment of their own career prospects, and ultimately on their satisfaction with work.

Thus, employees “know” about the upcoming bankruptcy of the company a few years before it happens. And taking into account their emotional assessments allows you to predict this bankruptcy when financial data is still “silent”: although on the short -term horizon the model using the mood data, on the contrary, begins to concede by the accuracy of one of the traditional models, it is more consistent and increases the forecast power of the methods based on financial data, the authors summarize.