Predicting the Insolvency of SMEs Using Technological Feasibility Assessment Information and Data Mining Techniques

Sanghoon Lee, Keunho Choi and Donghee Yoo
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Sanghoon Lee: Department of Management Information Systems, BERI, Gyeongsang National University, 501 Jinju-daero, Jinju 52828, Korea
Keunho Choi: Department of Business and Accounting, Hanbat National University, 125 Dongseo-daero, Yuseong-gu, Daejeon 34158, Korea
Donghee Yoo: Department of Management Information Systems, BERI, Gyeongsang National University, 501 Jinju-daero, Jinju 52828, Korea

Sustainability, 2020, vol. 12, issue 23, 1-17

Abstract: The government makes great efforts to maintain the soundness of policy funds raised by the national budget and lent to corporate. In general, previous research on the prediction of company insolvency has dealt with large and listed companies using financial information with conventional statistical techniques. However, small- and medium-sized enterprises (SMEs) do not have to undergo mandatory external audits, and the quality of accounting information is low due to weak internal control. To overcome this problem, we developed an insolvency prediction model for SMEs using data mining techniques and technological feasibility assessment information as non-financial information. We divided the dataset into two types of data based on three years of corporate age. The synthetic minority over-sampling technique (SMOTE) was used to solve the data imbalance that occurred at this time. Six insolvency prediction models were created using logistic regression, a decision tree, an artificial neural network, and an ensemble (i.e., boosting) of each algorithm. By applying a boosted decision tree, the best accuracies of 69.1% and 82.7% were derived, and by applying a decision tree, nine and seven influential factors affected the insolvency of SMEs established for fewer than three years and more than three years, respectively. In addition, we derived several insolvency rules for the two types of SMEs from the decision tree-based prediction model and proposed ways to enhance the health of loans given to potentially insolvent companies using these derived rules. The results of this study show that it is possible to predict SMEs’ insolvency using data mining techniques with technological feasibility assessment information and find meaningful rules related to insolvency.

Keywords: policy funds; SMEs; technological feasibility assessment; insolvency prediction model; SMOTE; logistic regression; decision tree; artificial neural network; boosting (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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