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  • #16
    Please use .png for graphic attachments as explained in FAQ Advice #12. Although people who answer Statalist questions can be assumed to have access to Stata, it is harder work to flip back and forth between a graph opened in Stata and this forum. That becomes impossible work if people's version of Stata means that they can't read graphs produced by your version.

    You seem unclear about what data you have but there is a limit to which we can tell you anything you don't know or can't expect to find out from the data source(s), which we don't know either.

    Jeff Wooldridge guessed, as I think just about any statistical person would do if they focused on the detail, that your Z score was what very often goes under that name, (some variable MINUS its mean) / its SD. Such a z score of necessity would be zero if a value were equal to the mean, and positive and negative respectively for values above and below the mean. That kind of z score is intrinsically not suitable for logarithms.

    What you are calling a z score has a very odd distribution with a discontinuity at about 1.6 and a range from about 0.0025 to about 5.8. You should be able to refine these guesses by showing summarize results.

    Although on the face of it an entirely positive variable that is positively skew might seem an obvious candidate for log transformation, in your own particular case, the transformation will be likely to produce a tail of outliers for very small values that could produce bizarre side-effects. You can examine this just by a scatter plot of ln z score versus z score and quantile plots.

    If I were reviewing this work I would expect an coherent explanation of the nature of this variable before there was any point in proceeding to DID. .

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    • #17

      Thank you Im still learning this.
      Im not at all.

      I had both with and without log. I just could not determine which one to use. It confuses me quite a bit when to use log.
      My z score have then following z score.
      Altman, 1968, introduces the Z score as a discriminant that can guide institutions, if an institution has a high Z score, i.e., above 3.0, this will interpret less time and effort used on investigation of loan applicants. Meanwhile those with a low Z score this could indicate more time and effort should be put in loan applicants’ investigation. Lower Z score indicates a greater risk of bankruptcy.

      Thank you for your response.

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      • #18
        So, there is a literature in finance (and ....) starting with https://onlinelibrary.wiley.com/doi/...1968.tb00843.x and this Z score has nothing to do with the conventional z-score in statistics.

        Whether taking logarithms is a good idea is still moot. But it's not utterly invalid if all Z score values are positive.

        I know many economists seem almost to have stopped using graphs after their first statistics course, but plotting Z score and ln Z score against leading predictors is the best way I know of understanding your data.

        Otherwise I think you need help from people working in economics and finance, and I do not.

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        • #19
          Thank you so much for reply!

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          • #20
            Originally posted by amalie larsen View Post
            Dimitriy: is it the with size then? Size is total assets logged. Is it also an elasticity then?
            Yes, that's correct since you have both logged. But maybe change the name?

            To add to what NC and JW brought up, I presume your ZScore is the corp finance version, which has a lower bound at zero that’s rarely reached since 1.8 already means distressed and anything above 3 is low risk of bankruptcy. Firms rarely fail that spectacularly to wind up at zero. The index is ​ζ = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E

            where
            • Zeta (ζ) is the Altman’s Z-score
            • A is the Working Capital/Total Assets ratio
            • B is the Retained Earnings/Total Assets ratio
            • C is the Earnings Before Interest and Tax/Total Assets ratio
            • D is the Market Value of Equity/Total Liabilities ratio
            • E is the Total Sales/Total Assets ratio
            There does not seem to be a good reason to log that unless it’s to facilitate calculating elasticities. But you can accomplish that by using margins, eyex() and margins, eydx() with an unlogged outcome and unlogged covariates. There are plenty of examples of that approach on this forum that you can find by searching.
            Last edited by Dimitriy V. Masterov; 23 Dec 2022, 07:58.

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            • #21
              Also, it seems odd to me to control for variables like TA that are already in the ZScore.

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              • #22
                #20 #21 Dimitriy V. Masterov It is excellent that someone with subject-matter expertise has chimed in and I hope to learn something too. Do you have a story for the discontinuity in distribution at around 1.6 remarked in #16?

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                • #23
                  To my eye, that's the threshold for financially distressed at 1.8. As the company gets near 1.8, investors start dumping the stock, so companies will tend to bunch up above it with accounting tricks until they can't.

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                  • #24
                    That’s a story.

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