In many cases, credit managers could easily predict corporate bankruptcies. Quite simply, a company declares bankruptcy because it does not have adequate capital to fund operations and remain solvent. Often, bankruptcy is the result of taking on too much risk, and this will be evident in a fundamental analysis of the financial statements. It stands to reason that a corporation’s public disclosure would provide ample warning of a high risk of bankruptcy…except when it doesn’t.

Indeed, amongst the 20 largest public company non-financial bankruptcy filings since 1980, nearly half were accused by regulators of manipulating their earnings to create the impression of a healthier company. And among those in the highly leveraged financial services industry, whether or not they actually declared bankruptcy, the speed at which recent banking institutions fell from grace
and the inability of the marketplace to value their assets gives one pause for concern as to whether the traditional ways of gauging bankruptcy risk has effectively protected stakeholders.

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