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A boosting approach for corporate failure prediction

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Abstract

Predicting corporate failure is an important management science problem. This is a typical classification question where the objective is to determine which indicators are involved in the failure/success of a corporation. Despite the importance of this problem, until now only classical machine learning tools have been considered to tackle this classification task. The objective of this paper is twofold. On the one hand, we introduce novel discerning measures to rank independent variables in a generic classification task. On the other hand, we apply boosting techniques to improve the accuracy of a classification tree. We apply this methodology to a set of European firms, considering the usual predicting variables such as financial ratios, as well as including novel variables rarely used before in corporate failure prediction, such as firm size, activity and legal structure. We show that our approach decreases the generalization error about thirty percent with respect to the error produced with a classification tree. In addition, the most important ratios deal with profitability and indebtedness, as is usual in failure prediction studies.

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Authors and Affiliations

  1. Economic and Business Sciences Faculty of Albacete, Castilla-La Mancha University, Plaza de la Universidad, 1., 02071, Albacete, Spain

    Esteban Alfaro Cortés, Matías Gámez Martínez & Noelia García Rubio

Authors
  1. Esteban Alfaro Cortés
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  2. Matías Gámez Martínez
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  3. Noelia García Rubio
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Correspondence to Esteban Alfaro Cortés.

Additional information

E. A. Cortés · M. G. Martínez · N. G. Rubio. The authors teach Statistics at the Faculty of Economic and Business Sciences in the University of Castilla-La Mancha. Esteban Alfaro completed his degree in Business in 1999 and got his Ph.D. in Economics in 2005, both in the University of Castilla-La Mancha. His thesis dealt with the application of ensemble classifiers to corporate failure prediction. Matías Gámez got his degree in Mathematics at the University of Granada in 1991 and finished a Master in Applied Statistics a year after. He completed his Ph.D. in Economics at the University of Castilla-La Mancha in 1998 on the application of geo-statistical techniques to the estimation of housing prices. Noelia García got her degree in Economics at the University of Madrid (UAM) in 1996 and completed her Ph.D. in Economics in 2004 on the construction of an intelligent and automated system for property valuation through the combination of neural nets and a geographic information system (GIS). Current research deals with spatial statistics and the combination of classifiers (decision trees and neural nets) for solving heated topics in the Economics.

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Cortés, E.A., Martínez, M.G. & Rubio, N.G. A boosting approach for corporate failure prediction. Appl Intell 27, 29–37 (2007). https://doi.org/10.1007/s10489-006-0028-9

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  • DOI: https://doi.org/10.1007/s10489-006-0028-9

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