Alternative bankruptcy prediction models using option-pricing theory

► We test empirical properties of the theoretical Black-Scholes-Merton (BSM) model. ► We evaluate the predictive ability of various BSM existing modifications. ► We estimate historic volatility directly from market returns on firm value. ► Parsimonious models using our direct volatility perform better than other models. ► Simpler modelling approaches relying on market observable data should be adopted.