Predicting Romanian Financial Distressed Companies

Madalina Andreica

No 37, Advances in Economic and Financial Research - DOFIN Working Paper Series from Bucharest University of Economics, Center for Advanced Research in Finance and Banking - CARFIB

Abstract: The study consisted in collecting financial information for a group of distressed and non-distressed Romanian listed companies during the period 2006–2008, in order to create early warning signals for financial distressed companies using the following methodologies: the Logistic and the Hazard model, the CHAID decision tree model and the Artificial Neural Network model (ANN). For each company a set of 14 financial ratios, that reflect the company’s profitability, solvency, asset utilization, growth ability and size, were calculated and then used in the study. A Principal Component Analysis was also used to reduce the dimensionality of the data space and to allow seeing that the 2 types of companies do form 2 distinct groups suggesting that the ratios used are useful enough to predict financial distress. The following 4 data sets were separately analyzed: first-year data to predict distress one year ahead, second-year data for a 2 year-ahead prediction, third-year data for a 3 year-ahead prediction, as well as cumulative three-year data to predict distress 1 year ahead by letting the ratios vary in time. For each data set, several prediction models were created using CHAID, the Logit and Hazard models as well as the ANN and the hybrid-ANN. The results are consistent with the theory and also to previous studies and the out-of-sample forecast accuracy of the estimated models of 73%-100% indicates that the proposed early warning models for the Romanian listed companies are quite efficient.

Keywords: early warning signals; CHAID; ANN (search for similar items in EconPapers)
Date: 2009-11
New Economics Papers: this item is included in nep-cmp and nep-for
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:cab:wpaefr:37

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