Decision tree based model of business failure prediction for Polish companies

Abstract

Research background: The issue of predicting the financial situation of companies is a relatively young field of economic research. Its origin dates back to the 30's of the 20th century, but constant research in this area proves the currentness of this topic even today. The issue of predicting the financial situation of a company is up to date not only for the company itself, but also for all stakeholders.
 Purpose of the article: The main purpose of this study is to create new prediction models by using the method of decision trees, in achieving sufficient prediction power of the generated model with a large database of real data on Polish companies obtained from the Amadeus database.
 Methods: As a result of the development of artificial intelligence, new methods for predicting financial failure of the company have been introduced into financial prediction analysis. One of the most widely used data mining techniques in this field is the method of decision trees. In the paper, we applied the CART and CHAID approach to create a model of predicting the financial difficulties of Polish companies.
 Findings & Value added: For the creation of the prediction model, a total of 37 financial and economic indicators of Polish companies were used. The resulting decision trees based prediction models for Polish companies reach a prediction power of more than 98%. The success of the classification for non-prosperous companies is more than 83%. The created decision tree-based prediction models are useful mainly for predicting the financial difficulties of Polish companies, but can also be used for companies in another country.

Financial distress prediction in Slovakia: An application of the CART algorithm

“…In the creation procedure, 37 financial indicators (Durica et al, 2019) calculated using real financial statements from 2016 and 2017, respectively, are used. Data from 2016 is used to create a two-year model, and the data from 2017 is used for one-year prediction.…”

“…(Valaskova et al, 2020) As independent variables, values of 37 financial indicators (not only ratios) calculated from real financial statements from 2016 to 2018 were used. They are presented and characterized in more details for example in Durica et al (2019). Of course, these indicators are not only the most frequently used (Korol, 2013) but also those less frequently used, which may consider the specificities of the Slovak economy.…”

Financial Distress and Bankruptcy Prediction in Conditions of Slovak Republic

“…We can say they are expecting acceptance from the scientific community and we will be able to see their use and verification only in a few years time. [23,24] Another new model for bankruptcy prediction was proposed by Svabova, Durica, Podhorska [25] using multivariate discriminant analysis. Valaskova, Kliestik, Kovacova [6] proposed a new model using multiple regression analysis.…”

Logit business failure prediction in V4 countries

“…93-114). Several studies provide an overview and comparison of existing prediction models (Pawelek et al, 2017;Prusak, 2018;Tokarski, 2018;Wyrobek and Kluza, 2018, Pociecha et al, 2018, Durica et al, 2019.…”