Predicting Corporate Financial Sustainability Using Novel Business Analytics

Kyoung-jae Kim, Kichun Lee and Hyunchul Ahn
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Kyoung-jae Kim: Department of Management Information Systems, Dongguk University-Seoul, Seoul 04620, Korea
Kichun Lee: Department of Industrial Engineering, Hanyang University, Seoul 04763, Korea
Hyunchul Ahn: Graduate School of Business IT, Kookmin University, Seoul 02707, Korea

Sustainability, 2018, vol. 11, issue 1, 1-17

Abstract: Measuring and managing the financial sustainability of the borrowers is crucial to financial institutions for their risk management. As a result, building an effective corporate financial distress prediction model has been an important research topic for a long time. Recently, researchers are exerting themselves to improve the accuracy of financial distress prediction models by applying various business analytics approaches including statistical and artificial intelligence methods. Among them, support vector machines (SVMs) are becoming popular. SVMs require only small training samples and have little possibility of overfitting if model parameters are properly tuned. Nonetheless, SVMs generally show high prediction accuracy since it can deal with complex nonlinear patterns. Despite of these advantages, SVMs are often criticized because their architectural factors are determined by heuristics, such as the parameters of a kernel function and the subsets of appropriate features and instances. In this study, we propose globally optimized SVMs, denoted by GOSVM, a novel hybrid SVM model designed to optimize feature selection, instance selection, and kernel parameters altogether. This study introduces genetic algorithm (GA) in order to simultaneously optimize multiple heterogeneous design factors of SVMs. Our study applies the proposed model to the real-world case for predicting financial distress. Experiments show that the proposed model significantly improves the prediction accuracy of conventional SVMs.

Keywords: financial distress prediction; support vector machines; instance selection; feature selection; genetic algorithm (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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