Graduation Year

2025

Date of Submission

12-2024

Document Type

Campus Only Senior Thesis

Degree Name

Bachelor of Arts

Department

Economics-Accounting

Reader 1

Matthew Magilke

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Abstract

This study investigates the reactions of corporate management and investors to changes in financial distress, measured by changes in the Altman Z-score, a widely recognized indicator of bankruptcy risk. By analyzing a dataset of publicly traded companies from 2016 to 2023, the research explores how Z-score changes influence management decisions, such as long-term debt levels, capital expenditures, and the decision to issue additional equity, alongside investor responses examined through monthly stock returns. Multivariate linear regressions were performed to capture these reactions by managers and investors. Companies experiencing significant Z-score declines employ conservative strategies, reducing capital expenditures and debt while increasing equity financing. These responses suggest a risk-averse strategy to navigating financial uncertainty, rather than employing a growth strategy to work through distress. Investor reactions to Z-score changes are statistically insignificant, with firm size, liquidity, and broader macroeconomic factors demonstrating a stronger impact on stock performance. The study bridges a gap in the existing literature by linking financial distress signals to managerial and investor behavior and exploring the magnitude of these effects.

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