Predicting financial distress: A comparison of survival analysis and decision tree techniques

Research output: Chapter in Book/Report/Conference proceedingConference contributionResearchpeer-review

15 Citations (Scopus)
26 Downloads (Pure)

Abstract

Financial distress and then the consequent failure of a business is usually an extremely costly and disruptive event. Statistical financial distress prediction models attempt to predict whether a business will experience financial distress in the future. Discriminant analysis and logistic regression have been the most popular approaches, but there is also a large number of alternative cutting - edge data mining techniques that can be used. In this paper, a semi-parametric Cox survival analysis model and non-parametric CART decision trees have been applied to financial distress prediction and compared with each other as well as the most popular approaches. This analysis is done over a variety of cost ratios (Type I Error cost: Type II Error cost) and prediction intervals as these differ depending on the situation. The results show that decision trees and survival analysis models have good prediction accuracy that justifies their use and supports further investigation.

Original languageEnglish
Title of host publicationEleventh International Conference on Communication Networks, ICCN 2015/India eleventh International Conference on Data Mining and Warehousing ICDMW 2015/India eleventh International Conference on Image and Signal Processing, ICISP 2015
EditorsPD Shenoy, SS Iyengar, KB Raja, KR Venugopal, R Buyya, LM Patnaik
PublisherElsevier
Pages396-404
Number of pages9
Volume54
DOIs
Publication statusPublished - 1 Jan 2015
Event11th International Conference on Data Mining and Warehousing (ICDMW) - Bangalore, Bangalore, India
Duration: 21 Aug 201523 Aug 2015

Publication series

NameProcedia Computer Science
PublisherElsevier BV
ISSN (Print)1877-0509

Conference

Conference11th International Conference on Data Mining and Warehousing (ICDMW)
CountryIndia
CityBangalore
Period21/08/1523/08/15

Cite this

Gepp, A., & Kumar, K. (2015). Predicting financial distress: A comparison of survival analysis and decision tree techniques. In PD. Shenoy, SS. Iyengar, KB. Raja, KR. Venugopal, R. Buyya, & LM. Patnaik (Eds.), Eleventh International Conference on Communication Networks, ICCN 2015/India eleventh International Conference on Data Mining and Warehousing ICDMW 2015/India eleventh International Conference on Image and Signal Processing, ICISP 2015 (Vol. 54, pp. 396-404). (Procedia Computer Science). Elsevier. https://doi.org/10.1016/j.procs.2015.06.046
Gepp, Adrian ; Kumar, Kuldeep. / Predicting financial distress : A comparison of survival analysis and decision tree techniques. Eleventh International Conference on Communication Networks, ICCN 2015/India eleventh International Conference on Data Mining and Warehousing ICDMW 2015/India eleventh International Conference on Image and Signal Processing, ICISP 2015. editor / PD Shenoy ; SS Iyengar ; KB Raja ; KR Venugopal ; R Buyya ; LM Patnaik. Vol. 54 Elsevier, 2015. pp. 396-404 (Procedia Computer Science).
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Gepp, A & Kumar, K 2015, Predicting financial distress: A comparison of survival analysis and decision tree techniques. in PD Shenoy, SS Iyengar, KB Raja, KR Venugopal, R Buyya & LM Patnaik (eds), Eleventh International Conference on Communication Networks, ICCN 2015/India eleventh International Conference on Data Mining and Warehousing ICDMW 2015/India eleventh International Conference on Image and Signal Processing, ICISP 2015. vol. 54, Procedia Computer Science, Elsevier, pp. 396-404, 11th International Conference on Data Mining and Warehousing (ICDMW), Bangalore, India, 21/08/15. https://doi.org/10.1016/j.procs.2015.06.046

Predicting financial distress : A comparison of survival analysis and decision tree techniques. / Gepp, Adrian; Kumar, Kuldeep.

Eleventh International Conference on Communication Networks, ICCN 2015/India eleventh International Conference on Data Mining and Warehousing ICDMW 2015/India eleventh International Conference on Image and Signal Processing, ICISP 2015. ed. / PD Shenoy; SS Iyengar; KB Raja; KR Venugopal; R Buyya; LM Patnaik. Vol. 54 Elsevier, 2015. p. 396-404 (Procedia Computer Science).

Research output: Chapter in Book/Report/Conference proceedingConference contributionResearchpeer-review

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AB - Financial distress and then the consequent failure of a business is usually an extremely costly and disruptive event. Statistical financial distress prediction models attempt to predict whether a business will experience financial distress in the future. Discriminant analysis and logistic regression have been the most popular approaches, but there is also a large number of alternative cutting - edge data mining techniques that can be used. In this paper, a semi-parametric Cox survival analysis model and non-parametric CART decision trees have been applied to financial distress prediction and compared with each other as well as the most popular approaches. This analysis is done over a variety of cost ratios (Type I Error cost: Type II Error cost) and prediction intervals as these differ depending on the situation. The results show that decision trees and survival analysis models have good prediction accuracy that justifies their use and supports further investigation.

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Gepp A, Kumar K. Predicting financial distress: A comparison of survival analysis and decision tree techniques. In Shenoy PD, Iyengar SS, Raja KB, Venugopal KR, Buyya R, Patnaik LM, editors, Eleventh International Conference on Communication Networks, ICCN 2015/India eleventh International Conference on Data Mining and Warehousing ICDMW 2015/India eleventh International Conference on Image and Signal Processing, ICISP 2015. Vol. 54. Elsevier. 2015. p. 396-404. (Procedia Computer Science). https://doi.org/10.1016/j.procs.2015.06.046