Predicting Financial Failure: Empirical Evidence from Publicly – Quoted Firms in Developed and Developing Countries

Yavuz Gül and Serpil Altinirmak

Journal of Research in Economics, Politics & Finance, 2025, vol. 10, issue 1, 107-126

Abstract: This paper analyzes the data of 570 firms from developed and developing countries between 2010 and 2019 in an attempt to create high–accuracy financial failure prediction models. In this sense, we utilize three different methods, namely logistic regression (LR), artificial neural networks (ANN), and decision trees (DT), and compare the classification accuracy performances of these techniques. Using 16 financial ratios as independent variables, ANN is able to generate the most accurate prediction and outperforms the other methods in predicting failure. Otherwise said, ANN yields a correct classification accuracy of 98.1% one year prior to failure while LR and DT achieve accuracy rates of 94.7% and 96.1%, respectively. Furthermore, the empirical results demonstrate that the classification accuracy rate reaches 92.5% by ANN, 91.1% by DT, and 84.4% by logistic regression two years in advance. The findings of current research provide valuable insights into financial failure prediction and may entice practical implications for stakeholders, especially investors and regulatory bodies, by indicating that the use of the ANN approach may be more effective.

Keywords: Financial Failure; Logistic Regression; Artificial Neural Networks; Decision Trees (search for similar items in EconPapers)
JEL-codes: C13 C15 C38 G33 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:ahs:journl:v:10:y:2025:i:1:p:107-126

DOI: 10.30784/epfad.1595915

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