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Forecasting business failure in China using case-based reasoning with hybrid case respresentation

Hui Li and Jie Sun
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Hui Li: School of Business Administration, Zhejiang Normal University, PR China, Postal: School of Business Administration, Zhejiang Normal University, PR China
Jie Sun: School of Business Administration, Zhejiang Normal University, PR China, Postal: School of Business Administration, Zhejiang Normal University, PR China

Journal of Forecasting, 2010, vol. 29, issue 5, 486-501

Abstract: Case-based reasoning (CBR) is a very effective and easily understandable method for solving real-world problems. Business failure prediction (BFP) is a forecasting tool that helps people make more precise decisions. CBR-based BFP is a hot topic in today's global financial crisis. Case representation is critical when forecasting business failure with CBR. This research describes a pioneer investigation on hybrid case representation by employing principal component analysis (PCA), a feature extraction method, along with stepwise multivariate discriminant analysis (MDA), a feature selection approach. In this process, sample cases are represented with all available financial ratios, i.e., features. Next, the stepwise MDA is used to select optimal features to produce a reduced-case representation. Finally, PCA is employed to extract the final information representing the sample cases. All data signified by hybrid case representation are recorded in a case library, and the k -nearest-neighbor algorithm is used to make the forecasting. Thus we constructed a hybrid CBR (HCBR) by integrating hybrid case representation into the forecasting tool. We empirically tested the performance of HCBR with data collected for short-term BFP of Chinese listed companies. Empirical results indicated that HCBR can produce more promising prediction performance than MDA, logistic regression, classical CBR, and support vector machine. Copyright © 2009 John Wiley & Sons, Ltd.

Date: 2010
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