Application of the Merton Model and the Altman Z-score Model in Credit Risk Assessment - an Empirical Study on Chinese Listed Companies

Sammanfattning: Corporate default poses significant risks to investors and stakeholders, highlighting the importance of predicting and managing financial risk effectively. When the geographical scope is narrowed down to China, the unique characteristics of the Chinese market, such as the lack of comprehensive credit risk databases and the influence of state-owned enterprises and small-medium enterprises, present challenges in accurately assessing creditworthiness. To address these challenges, the study applies two well-established credit risk models: the Merton model and the Altman Z-score model. Both models have undergone extensive empirical testing and provide valuable insights into credit risk assessment but have been poorly tested in China. Thus, by comparing the performance of the Merton model and the Altman Z-score model, this study aims to determine which model is more suitable for predicting the credit risk of companies in the Chinese market. The model performance is then evaluated using various statistical measures, including ROC curve analysis, T-tests, and Mann-Whitney U tests. According to the results, neither of the two models has outstanding performance in assessing default risk in China, but Altman Z-score model is slightly better than the Merton model. This study aims to bridge the research gap in credit risk assessment for Chinese listed companies, and it is expected that the findings will contribute to a better understanding of credit risk modeling in the Chinese market and provide practical implications for financial institutions and investors.