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Bankruptcy prediction by generalized additive models

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  • Daniel Berg

Abstract

We compare several accounting‐based models for bankruptcy prediction. The models are developed and tested on large data sets containing annual financial statements for Norwegian limited liability firms. Out‐of‐sample and out‐of‐time validation shows that generalized additive models significantly outperform popular models like linear discriminant analysis, generalized linear models and neural networks at all levels of risk. Further, important issues like default horizon and performance depreciation are examined. We clearly see a performance depreciation as the default horizon is increased and as time goes by. Finally a multi‐year model, developed on all available data from three consecutive years, is compared with a one‐year model, developed on data from the most recent year only. The multi‐year model exhibits a desirable robustness to yearly fluctuations that is not present in the one‐year model. Copyright © 2006 John Wiley & Sons, Ltd.

Suggested Citation

  • Daniel Berg, 2007. "Bankruptcy prediction by generalized additive models," Applied Stochastic Models in Business and Industry, John Wiley & Sons, vol. 23(2), pages 129-143, March.
    • Handle: RePEc:wly:apsmbi:v:23:y:2007:i:2:p:129-143
    DOI: 10.1002/asmb.658
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    Cited by:

    1. Calabrese, Raffaella & Dombrowski, Timothy & Mandel, Antoine & Pace, R. Kelley & Zanin, Luca, 2024. "Impacts of extreme weather events on mortgage risks and their evolution under climate change: A case study on Florida," European Journal of Operational Research, Elsevier, vol. 314(1), pages 377-392.
    2. K. W. De Bock & D. Van Den Poel, 2012. "Reconciling Performance and Interpretability in Customer Churn Prediction using Ensemble Learning based on Generalized Additive Models," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 12/805, Ghent University, Faculty of Economics and Business Administration.
    3. Stephan Höcht & Rudi Zagst, 2010. "Pricing credit derivatives under stochastic recovery in a hybrid model," Applied Stochastic Models in Business and Industry, John Wiley & Sons, vol. 26(3), pages 254-276, May.
    4. Giordani, Paolo & Jacobson, Tor & Schedvin, Erik von & Villani, Mattias, 2014. "Taking the Twists into Account: Predicting Firm Bankruptcy Risk with Splines of Financial Ratios," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 49(4), pages 1071-1099, August.
    5. De Bock, Koen W. & Coussement, Kristof & Van den Poel, Dirk, 2010. "Ensemble classification based on generalized additive models," Computational Statistics & Data Analysis, Elsevier, vol. 54(6), pages 1535-1546, June.
    6. du Jardin, Philippe, 2015. "Bankruptcy prediction using terminal failure processes," European Journal of Operational Research, Elsevier, vol. 242(1), pages 286-303.
    7. Ptak-Chmielewska Aneta, 2021. "Bankruptcy prediction of small- and medium-sized enterprises in Poland based on the LDA and SVM methods," Statistics in Transition New Series, Polish Statistical Association, vol. 22(1), pages 179-195, March.
    8. Christian Lohmann & Thorsten Ohliger, 2020. "Bankruptcy prediction and the discriminatory power of annual reports: empirical evidence from financially distressed German companies," Journal of Business Economics, Springer, vol. 90(1), pages 137-172, February.
    9. Umair Bin YOUSAF & Khalil JEBRAN & Man WANG, 2022. "A Comparison of Static, Dynamic and Machine Learning Models in Predicting the Financial Distress of Chinese Firms," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 122-138, April.
    10. Alessandra Amendola & Francesco Giordano & Maria Lucia Parrella & Marialuisa Restaino, 2017. "Variable selection in high‐dimensional regression: a nonparametric procedure for business failure prediction," Applied Stochastic Models in Business and Industry, John Wiley & Sons, vol. 33(4), pages 355-368, August.
    11. Shuzhuan Zheng & Rong Liu & Lijian Yang & Wolfgang K. Härdle, 2016. "Statistical inference for generalized additive models: simultaneous confidence corridors and variable selection," TEST: An Official Journal of the Spanish Society of Statistics and Operations Research, Springer;Sociedad de Estadística e Investigación Operativa, vol. 25(4), pages 607-626, December.
    12. Aneta Ptak-Chmielewska, 2021. "Bankruptcy prediction of small- and medium-sized enterprises in Poland based on the LDA and SVM methods," Statistics in Transition New Series, Polish Statistical Association, vol. 22(1), pages 179-195, March.
    13. repec:hum:wpaper:sfb649dp2014-008 is not listed on IDEAS
    14. Andreeva, Galina & Calabrese, Raffaella & Osmetti, Silvia Angela, 2016. "A comparative analysis of the UK and Italian small businesses using Generalised Extreme Value models," European Journal of Operational Research, Elsevier, vol. 249(2), pages 506-516.
    15. Christian Lohmann & Thorsten Ohliger, 2017. "Nonlinear Relationships and Their Effect on the Bankruptcy Prediction," Schmalenbach Business Review, Springer;Schmalenbach-Gesellschaft, vol. 18(3), pages 261-287, August.
    16. Nyitrai, Tamás, 2014. "Növelhető-e a csőd-előrejelző modellek előre jelző képessége az új klasszifikációs módszerek nélkül? [Can the predictive capacity of bankruptcy forecasting models be increased without new classific," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(5), pages 566-585.
    17. Petr Jakubík & Petr Teplý, 2011. "The JT Index as an Indicator of Financial Stability of Corporate Sector," Prague Economic Papers, Prague University of Economics and Business, vol. 2011(2), pages 157-176.
    18. Selcuk Bayraci, 2017. "Application of profit-based credit scoring models using R," Romanian Statistical Review, Romanian Statistical Review, vol. 65(4), pages 3-28, December.
    19. Zheng, Shuzhuan & Liu, Rong & Yang, Lijian & Härdle, Wolfgang Karl, 2014. "Simultaneous confidence corridors and variable selection for generalized additive models," SFB 649 Discussion Papers 2014-008, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    20. Fitzpatrick, Trevor & Mues, Christophe, 2016. "An empirical comparison of classification algorithms for mortgage default prediction: evidence from a distressed mortgage market," European Journal of Operational Research, Elsevier, vol. 249(2), pages 427-439.
    21. Mark Clintworth & Dimitrios Lyridis & Evangelos Boulougouris, 2023. "Financial risk assessment in shipping: a holistic machine learning based methodology," Maritime Economics & Logistics, Palgrave Macmillan;International Association of Maritime Economists (IAME), vol. 25(1), pages 90-121, March.

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