Unveiling the diverse efficacy of artificial neural networks and logistic regression: A comparative analysis in predicting financial distress

Abstract

The prediction of financial distress has emerged as a significant concern over a prolonged period spanning more than half a century. This subject has garnered considerable attention owing to the precise outcomes derived from its predictive models. The main objective of this study is to predict financial distress using two types of Artificial Neural Networks (ANN) compared to the Logistic Regression (LR), and this will be done by relying on the data of 12 Algerian companies for the period 2015-2019. The reason for choosing these two types of networks in particular, is attributed to the fact that Elman Neural Network (ENN) is commonly used network, in contrast to the Feed-forward Distributed Time Delay Neural Network (FFDTDNN). Regarding the choice of these companies as a study sample, can be attributed to the similarity in the temporal range covered by their financial statements, coupled with their approximate parity in terms of asset size. This study concluded that the ENN model outperformed the LR model in predicting financial distress with a classification accuracy of 100%. On the other hand, the LR model outperformed the FFDTDNN with a classification accuracy of 83.33%. Therefore, it can be asserted that ANNs cannot be regarded as superior to Logistic Regression (LR) in all statuses. Instead, it is accurate to affirm that specific types of ANNs exhibit greater efficacy than LR in predicting financial distress, while other types demonstrate relatively diminished effectiveness.

Crunching Numbers, Making Decisions: Artificial Intelligence and Statistics for Financial Distress Forecasting in Algeria and Saudi Arabia

“…(Sabek & saihi, 2021) used back-propagation Neural Network to predict financial distress, and concluded that this network has a high ability to classify correctly. (Sabek A. , 2023) compared two types of Artificial Neural Networks (ANNs) with Logistic Regression (LR), and concluded that some types of ANNs are better than LR in classification and others are not. (Sabek & Horak, 2023) used Gaussian Process Regression (GPR) to predict financial distress, compared its results with deep learning models, including LR, and concluded that GPR is better than LR and all other models, except for Support Vector Machine, which achieved the same classification accuracy.…”