Methodological approach of construction business failure prediction studies: a review

Abstract

Performance of bankruptcy prediction models (BPM), which partly depends on the methodological approach used to develop it, has virtually stagnated over the years. The methodological positions of BPM studies were thus investigated. Systematic review was used to search and retrieve 70 journal articles and doctoral theses. Their “general methods” and “philosophical underpinnings” were investigated using summary of findings tables and meta-analysis. “General methods” results showed positive trends in terms of techniques being used, error cost consideration and model validation, with some use of skewed data being the main drawback. For “philosophical underpinnings”, positivism paradigm was discovered to be at the core of BPM studies. This is deemed inadequate because of the need to consider industries’ dynamism, financial variables flaws and social factors which actually lead to the financial status of firms. The pragmatism paradigm using mixed method is proposed. A research design framework for executing the proposed methodology is presented. This will help BPM developers go through more rigorous and robust methodology to deliver better and more valid models. Limitations of study include not reviewing studies not reported in English language and impact of different countries’ accounting practices on ratios. Limited availability of theses’ database resulted in reviewing only four theses.

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