The Good, the Bad, and the Bankrupt: A Super-Efficiency DEA and LASSO Approach Predicting Corporate Failure

Ioannis Dokas (), George Geronikolaou, Sofia Katsimardou and Eleftherios Spyromitros
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Ioannis Dokas: Department of Economics, Democritus University of Thrace, University Campus, 69100 Komotini, Greece
George Geronikolaou: Department of Economics, Democritus University of Thrace, University Campus, 69100 Komotini, Greece
Sofia Katsimardou: Department of Economics, Democritus University of Thrace, University Campus, 69100 Komotini, Greece
Eleftherios Spyromitros: Department of Economics, Democritus University of Thrace, University Campus, 69100 Komotini, Greece

JRFM, 2025, vol. 18, issue 9, 1-23

Abstract: Corporate failure prediction remains a major topic in the literature. Numerous methodologies have been established for its assessment, while data envelopment analysis (DEA) has received particular attention. This study contributes to the literature, establishing a new approach in the construction process of prediction models based on the combination of logistic LASSO and an advanced version of data envelopment analysis (DEA). We adopt the modified slacks-based super-efficiency measure (modified super-SBM-DEA), following the “Worst practice frontier” approach, and focus on the selection process of predictive variables, implementing the logistic LASSO regression. A balanced sample with one-to-one matching between forty-five firms that filed for reorganization under U.S. bankruptcy law during the period 2014–2020 and forty-five non-failed firms of a similar size from the U.S. energy economic sector has been used for the empirical analysis. The proposed methodology offers superior results in terms of corporate failure prediction accuracy. For the dynamic assessment of failure, Malmquist DEA has been implemented during the five fiscal years prior to the event of failure, offering insights into financial distress before the event of a default. The model outperforms alternatives by achieving higher overall prediction accuracy (85.6%), the better identification of failed firms (91.1%), and the improved classification of non-failed firms (80%). Compared to prior DEA-based models, it demonstrates superior predictive performance with lower Type I and Type II errors and higher sensitivity as well as specificity. These results highlight the model’s effectiveness as a reliable early warning tool for bankruptcy prediction.

Keywords: corporate failure prediction; financial ratios; logistic LASSO; super-SBM-DEA; Malmquist; US firms (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2025
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