Bootstrap Replacement to Validate the Influence of the Economic Cycle on the Structure and the Accuracy Level of Business Failure Prediction Models

AbstractBackground: Research in business failure and insolvency prediction provides numerous potential variables, which are in the position to differentiate between solvent and insolvent firms. Nevertheless, not all of them have the same discriminatory power, and therefore their general applicability as crisis indicators within early warning systems seems questionable. Objectives: The paper aims to demonstrate that gearing-ratio is not an appropriate predictor for firm failures/bankruptcies. Methods/Approach: The first and the second order derivatives for the gearing-ratio formula were computed and mathematically analysed. Based on these results an interpretation was given and the suitability of gearing-ratio as a discriminator within business failure prediction models was discussed. These theoretical findings were then empirically tested using financial figures from financial statements of Austrian companies for the observation period between 2008 and 2010. Results: The theoretical assumptions showed that gearing-ratio is not a suitable predictor for early warning systems. This finding was confirmed with empirical data. Conclusions: The inclusion of gearing-ratio within business failure prediction models is not able to provide early warning signals and should therefore be ignored in future model building attempts.

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The success of business failure prediction models

Journal of Banking & Finance ◽

10.1016/0378-4266(84)90003-7 ◽

1984 ◽

Vol 8 (2) ◽

pp. 171-198 ◽

Cited By ~ 132

Author(s):

Edward I. Altman

Keyword(s):

Prediction Models ◽

Failure Prediction ◽

Business Failure

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Business Failure Prediction for Slovak Small and Medium-Sized Companies

Sustainability ◽

10.3390/su12114572 ◽

2020 ◽

Vol 12 (11) ◽

pp. 4572 ◽

Cited By ~ 2

Author(s):

Lucia Svabova ◽

Lucia Michalkova ◽

Marek Durica ◽

Elvira Nica

Keyword(s):

Logistic Regression ◽

Discriminant Analysis ◽

National Economy ◽

Prediction Models ◽

Failure Prediction ◽

Real Data ◽

Business Failure ◽

Early Prediction ◽

Combined Model ◽

Financial Difficulties

Prediction of the financial difficulties of companies has been dealt with over the last years by scientists and economists worldwide. Several prediction models mostly focused on a particular sector of the national economy, have been created also in Slovakia. The main purpose of this paper is to create new prediction models for small and medium-sized companies in Slovakia, based on real data from the Amadeus database from the years 2016–2018. We created prediction models of financial difficulties of companies for 1 year in advance and also a model for 2 years prediction. These models are based on the combination of two methods, discriminant analysis and logistic regression that belong, among others, to the group of the most commonly used methods to derive prediction models of financial difficulties of the companies. The overall prediction powers of the combined model are 90.6%, 93.8% and 90.4%. The results of this analysis can be used for early prediction of the financial difficulties of the company, that could be very useful for all the stakeholders.

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