Predicting bankruptcy in construction business: Traditional model validation and formulation of a new model

Abstract

When predicting bankruptcy of a company basing on its financial statements, the line of business in which the company is operating plays a significant role in terms of prediction accuracy.This accuracy is particularly crucial to banks and businesses which realise sales mostly on credit.The failure to recognise a client's or business partner's financial difficulties or the threat of bankruptcy with sufficient accuracy could lead to significant losses.Bankruptcy prediction models are used for these purposes.Most of the models created have been dedicated to the branch of manufacturing, while the branch of construction is relatively neglected by the mainstream literature.Traditional bankruptcy prediction models cannot be used effectively due to specifics of construction business.The aim of this paper is to test the current accuracies of five selected bankruptcy models in predicting the bankruptcy of construction companies.An additional aim is to create a new model designed specifically for this branch.The research was conducted on the sample of Czech companies.The method of Receiver Operating Characteristic was applied as the measure of accuracy for testing the models.The model created during the course of this research achieved an accuracy higher by 3.6 to 8 percent than the traditional models tested.

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