KZ Index

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Definition

The KZ-Index (Kaplan-Zingales Index) is a relative measurement of reliance on external financing. Companies with a higher KZ-Index scores are more likely to experience difficulties when financial conditions tighten since they may have difficulty financing their ongoing operations.

IMPORTANT NOTES:
1) The model is a probabilistic model, so it will not perfectly predict which companies are financially constrained and which are not, but it should help to raise warning flags.
2) The synthetic KZ-Index that we use was developed only for non-financial firms, so it is safest to disregard financial firms' KZ-Index scores.

The score is relative, so knowledge of the overall universe of firms is helpful to gauge the standing of the firm. Here are percentiles of scores for all companies in our database as of September 2nd, 2011:

90th: 10.12 (10% of companies have higher - worse - scores than this)
75th: 3.57
50th: 1.01
25th: -2.78
10th: -14.43 (10% of companies have lower - better - scores than this)

For interested users, our index is based on of the Synthetic Kaplan-Zingales Index presented in Lamont, Polk, and Saa-Requejo (2001), Financial Constraints and Stock Returns.

Formula

The KZ-Index (Kaplan-Zingales Index) is based on the following five-factor model as described in Lamont, Polk and Saa-Requejo (2001):

KZ Index = -1.001909 x Cash Flows / K + 0.2826389 x Q + 3.139193 x Debt / Total Capital + '-39.3678 x Dividends / K + -1.314759 x Cash / K

Where:

Cash Flows = (Income Before Extraordinary Itemst + Total Depreciation and Amortizationt)

K = PP&Et-1

Q = (Market Capitalizationt + Total Shareholder's Equityt - Book Value of Common Equityt - Deferred Tax Assetst) / Total Shareholder's Equityt

Debt = Total Long Term Debtt + Notes Payablet + Current Portion of Long Term Debtt

Dividends = Total Cash Dividends Paidt (common and preferred)

Cash = Cash and Short-Term Investmentst

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