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In this paper, we present a general framework for understanding the role of arti®cial neural networks (ANNs) in bankruptcy prediction. We give a comprehensive review of neural network applications in this area and illustrate the link between neural networks and traditional Bayesian classi®cation theory. The method of cross-validation is used to examine the between-sample variation of neural networks for bankruptcy prediction. Based on a matched sample of 220 ®rms, our ®ndings indicate that neural networks are signi®cantly better than logistic regression models in prediction as well as classi®cation rate estimation. In addition, neural networks are robust to sampling variations in overall classi®cation performance. Ó

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