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Does Compustat Data Standardization Improve Bankruptcy Prediction Models?

Capital IQ's Compustat database is commonly used in empirical accounting research. Numbers that appear in Compustat are standardized to ensure "...consistent and comparable data across companies, industries and business cycles..." However, there has been no evidence in the academic literature that Compustat's standardized numbers provide more benefits than the original numbers in financial statements. This is the first study to examine the effects of Compustat's data standardization using bankruptcy prediction models as examples. Specifically, we study whether using Compustat's standardized data as opposed to original 10-K data improves Altman's 1968 and Ohlson's 1980 bankruptcy prediction models. We find that Compustat's data standardization not only yields no improvements for bankruptcy prediction models, but also has a significant negative impact on the predictive accuracy of Altman's model (up to 8.56%).