Papers: Idiosyncratic Risk A Function of the Time Interval

In perhaps one of the most rigorous academic research projects ever undertaken to test the validity and effectiveness of a wide universe of financial metrics, Carton and Hofer, 2006 make the following concluding remark, “Very few non-public companies monitor the change in their Altman’s Z-score. However, the findings of this research indicate that this is the single most powerful measure for monitoring shareholder returns for both annual and three year time frames. Since this is a survival measure that is also important to creditors, management should pay particular attention to this financial performance metric”. Indeed, it only makes sense that this important measure once again outperforms every metric that it is compared against for the Z-score touches nearly every critical dimension of financial performance. While leveraging the benefits of this important metric makes perfect sense, it is the notion of capturing its change that is most meaningful. This article examines the challenges associated with capturing change and puts forth one solution to help make the process of measuring change useful from a practical perspective.