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Ensemble Model of the Financial Distress Prediction in Visegrad Group Countries

Michal Pavlicko (), Marek Durica () and Jaroslav Mazanec ()
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Michal Pavlicko: Department of Quantitative Methods and Economic Informatics, The Faculty of Operation and Economics of Transport and Communications, University of Zilina, Univerzitna 8215/1, 010 26 Zilina, Slovakia
Marek Durica: Department of Quantitative Methods and Economic Informatics, The Faculty of Operation and Economics of Transport and Communications, University of Zilina, Univerzitna 8215/1, 010 26 Zilina, Slovakia
Jaroslav Mazanec: Department of Quantitative Methods and Economic Informatics, The Faculty of Operation and Economics of Transport and Communications, University of Zilina, Univerzitna 8215/1, 010 26 Zilina, Slovakia

Mathematics, 2021, vol. 9, issue 16, 1-26

Abstract: The issue of prediction of financial state, or especially the threat of the financial distress of companies, is very topical not only for the management of the companies to take the appropriate actions but also for all the stakeholders to know the financial health of the company and its possible future development. Therefore, the main aim of the paper is ensemble model creation for financial distress prediction. This model is created using the real data on more than 550,000 companies from Central Europe, which were collected from the Amadeus database. The model was trained and validated using 27 selected financial variables from 2016 to predict the financial distress statement in 2017. Five variables were selected as significant predictors in the model: current ratio, return on equity, return on assets, debt ratio, and net working capital. Then, the proposed model performance was evaluated using the values of the variables and the state of the companies in 2017 to predict financial status in 2018. The results demonstrate that the proposed hybrid model created by combining methods, namely RobustBoost, CART, and k-NN with optimised structure, achieves better prediction results than using one of the methods alone. Moreover, the ensemble model is a new technique in the Visegrad Group (V4) compared with other prediction models. The proposed model serves as a one-year-ahead prediction model and can be directly used in the practice of the companies as the universal tool for estimation of the threat of financial distress not only in Central Europe but also in other countries. The value-added of the prediction model is its interpretability and high-performance accuracy.

Keywords: CART; ensemble model; financial distress; k-NN; prediction model; RobustBoost; Visegrad group (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2021
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