Article2009

Business failure prediction using decision trees

Adrian Gepp · Kuldeep Kumar · Sukanto Bhattacharya

145 citations0/0 files storedJournal of Forecasting

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Financial Distress and Bankruptcy Prediction Corporate Insolvency and Governance Forecasting Techniques and Applications

Abstract

Abstract Accurate business failure prediction models would be extremely valuable to many industry sectors, particularly financial investment and lending. The potential value of such models is emphasised by the extremely costly failure of high‐profile companies in the recent past. Consequently, a significant interest has been generated in business failure prediction within academia as well as in the finance industry. Statistical business failure prediction models attempt to predict the failure or success of a business. Discriminant and logit analyses have traditionally been the most popular approaches, but there are also a range of promising non‐parametric techniques that can alternatively be applied. In this paper, the relatively new technique of decision trees is applied to business failure prediction. The numerical results suggest that decision trees could be superior predictors of business failure as compared to discriminant analysis. Copyright © 2009 John Wiley & Sons, Ltd.

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References

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