Business failure prediction using statistical techniques: A review

Accurate business failure prediction models would be extremely valuable to many industry sectors, particularly in financial investment and lending. The potential value of such models has been recently emphasised by the extremely cosdy failure of high profile businesses in both Australia and overseas, such as HIH (Australia) and Enron (USA). Consequently, there has been a significant increase in interest in business failure prediction from both industry and academia.

Statistical business failure prediction models attempt to predict the failure or success of a business. Discriminant and logit analyses are the most popular approaches, and there are also a large number of alternatives. In this paper, the various techniques used in previous studies are presented and reviewed, including two alternative techniques that have produced promising results, namely sur vival analysis and decision trees.