Predicting the Insolvency of SMEs Using Technological Feasibility Assessment Information and Data Mining Techniques

Abstract

The government makes great efforts to maintain the soundness of policy funds raised by the national budget and lent to corporate. In general, previous research on the prediction of company insolvency has dealt with large and listed companies using financial information with conventional statistical techniques. However, small- and medium-sized enterprises (SMEs) do not have to undergo mandatory external audits, and the quality of accounting information is low due to weak internal control. To overcome this problem, we developed an insolvency prediction model for SMEs using data mining techniques and technological feasibility assessment information as non-financial information. We divided the dataset into two types of data based on three years of corporate age. The synthetic minority over-sampling technique (SMOTE) was used to solve the data imbalance that occurred at this time. Six insolvency prediction models were created using logistic regression, a decision tree, an artificial neural network, and an ensemble (i.e., boosting) of each algorithm. By applying a boosted decision tree, the best accuracies of 69.1% and 82.7% were derived, and by applying a decision tree, nine and seven influential factors affected the insolvency of SMEs established for fewer than three years and more than three years, respectively. In addition, we derived several insolvency rules for the two types of SMEs from the decision tree-based prediction model and proposed ways to enhance the health of loans given to potentially insolvent companies using these derived rules. The results of this study show that it is possible to predict SMEs’ insolvency using data mining techniques with technological feasibility assessment information and find meaningful rules related to insolvency.

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Tree-Based Prediction of Influential Factors and Information Mining

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A Systematic Literature Review on Corporate Insolvency Prevention Using Artificial Intelligence Algorithms

“…But, every company has a slightly different mindset, and therefore a standardized approach to insolvency prevention is a good base but a skilled researcher needs to have the right information about the past, present and the future of a business (Jayasekera, 2018). The keyword and part of the focus in this article are SMEs and in that regard a slightly different approach to insolvency prediction is take due to the nature of SMEs (Lee, Choi and Yoo, 2020).…”

“…In the last few years, there is a growing trend of observing and researching small and medium enterprises as they have always been hard to audit because of their dynamic structure. In the researches of (Camacho-Miñano, Segovia-Vargas and Pascual-Ezama, 2015;Tobback et al, 2017;Lee, Choi and Yoo, 2020) a lot of care is focused on the issues concerning SMEs. This is mainly because many surveyed enterprises are younger than three years, and no relevant data can be collected in that timeframe.…”