Master's Thesis from the year 2005 in the subject Business economics - Accounting and Taxes, grade: 1,0, European University Viadrina Frankfurt (Oder), course: International Business Administration, language: English, abstract: Bankruptcy prediction has become during the past 3 decades a matter of ever rising academic interest and intensive research. This is due to the academic appeal of the problem, combined with its importance in practical applications. The practical importance of bankruptcy prediction models grew recently even more, with “Basle-II” regulations, which were elaborated by Basle Committee on Banking Supervision to enhance the stability of international financial system. These regulations oblige financial institutions and banks to estimate the probability of default of their obligors. There exist some fundamental economic theory to base bankruptcy prediction models on, but this typically relies on stock market prices of companies under consideration. These prices are, however, only available for large public listed companies. Models for private firms are therefore empirical in their nature and have to rely on rigorous statistical analysis of all available information for such firms. In 95% of cases, this information is limited to accounting information from the financial statements. Large databases of financial statements (e.g. Compustat in the USA) are maintained and often available for research purposes. Accounting information is particularly important for bankruptcy prediction models in emerging markets. This is because the capital markets in these countries are often underdeveloped and illiquid and don’t deliver sufficient stock market data, even for public/listed companies, for structural models to be applied. The accounting information is normally summarized in so-called financial ratios. Such ratios (e.g. leverage ratio, calculated as Debt to Total Assets of a company) have a long tradition in accounting analysis. Many of these ratios are believed to reflect the financial health of a company and to be related to the bankruptcy. However, these beliefs are often very vague (e.g. leverages above 70% might provoke a bankruptcy) and subjective. Quantitative bankruptcy prediction models objectify these beliefs in that they apply statistical techniques to the accounting data. [...]

This book proposes complex hierarchical deep architectures (HDA) for predicting bankruptcy, a topical issue for business and corporate institutions that in the past has been tackled using statistical, market-based and machine-intelligence prediction models. The HDA are formed through fuzzy rough tensor deep staking networks (FRTDSN) with structured, hierarchical rough Bayesian (HRB) models. FRTDSN is formalized through TDSN and fuzzy rough sets, and HRB is formed by incorporating probabilistic rough sets in structured hierarchical Bayesian model. Then FRTDSN is integrated with HRB to form the compound FRTDSN-HRB model. HRB enhances the prediction accuracy of FRTDSN-HRB model. The experimental datasets are adopted from Korean construction companies and American and European non-financial companies, and the research presented focuses on the impact of choice of cut-off points, sampling procedures and business cycle on the accuracy of bankruptcy prediction models. The book also highlights the fact that misclassification can result in erroneous predictions leading to prohibitive costs to investors and the economy, and shows that choice of cut-off point and sampling procedures affect rankings of various models. It also suggests that empirical cut-off points estimated from training samples result in the lowest misclassification costs for all the models. The book confirms that FRTDSN-HRB achieves superior performance compared to other statistical and soft-computing models. The experimental results are given in terms of several important statistical parameters revolving different business cycles and sub-cycles for the datasets considered and are of immense benefit to researchers working in this area.

Bankruptcy prediction is one of the most important research areas in corporate finance. Bankruptcies are an indispensable element of the functioning of the market economy, and at the same time generate significant losses for stakeholders. Hence, this book was established to collect the results of research on the latest trends in predicting the bankruptcy of enterprises. It suggests models developed for different countries using both traditional and more advanced methods. Problems connected with predicting bankruptcy during periods of prosperity and recession, the selection of appropriate explanatory variables, as well as the dynamization of models are presented. The reliability of financial data and the validity of the audit are also referenced. Thus, I hope that this book will inspire you to undertake new research in the field of forecasting the risk of bankruptcy.