Predicting default of a small business using different definitions of financial distress

Lin S-M, J Ansell and G Andreeva
Additional contact information
Lin S-M: The University of Edinburgh, Edinburgh, UK
J Ansell: The University of Edinburgh, Edinburgh, UK
G Andreeva: The University of Edinburgh, Edinburgh, UK

Journal of the Operational Research Society, 2012, vol. 63, issue 4, 539-548

Abstract: The paper introduces a number of risk-rating models for UK small businesses applying an accounting-based approach, which uses financial ratios to predict corporate bankruptcy. An enhancement to these models is considered through features typical to retail credit risk modelling. A common problem of default prediction consists in the relatively small number of bankruptcies or real defaults available for model-building. In order to expand the ‘default’ group beyond bankrupt companies, the paper considers adopting four different definitions of ‘a failing business’ by investigating combinations of financial distress levels. The impact of each default definition on the choice of predictor variables and on the model's predictive accuracy is explored. In addition, the paper examines the value of categorizing financial ratios used as predictor variables.

Date: 2012
References: Add references at CitEc
Citations: View citations in EconPapers (16)

Downloads: (external link)
http://www.palgrave-journals.com/jors/journal/v63/n4/pdf/jors201165a.pdf Link to full text PDF (application/pdf)
http://www.palgrave-journals.com/jors/journal/v63/n4/full/jors201165a.html Link to full text HTML (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pal:jorsoc:v:63:y:2012:i:4:p:539-548

Ordering information: This journal article can be ordered from
http://www.springer. ... search/journal/41274

Access Statistics for this article

Journal of the Operational Research Society is currently edited by Tom Archibald and Jonathan Crook

More articles in Journal of the Operational Research Society from Palgrave Macmillan, The OR Society
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().