Using Rough Set and Worst Practice DEA in Business Failure Prediction

Abstract

Abstract. This paper proposes a hybrid approach that predicts the failure of firms based on the past business data, combining rough set approach and worst practice data envelopment analysis (DEA). The worst practice DEA can identify worst performers (in quantitative financial data) by placing them on the frontier while the rules developed by rough set uses non-financial information to predict the characteristics of failed firms. Both DEA and rough set are commonly used in practice. Both have limitations. The hybrid model Rough DEA takes the best of both models, by avoiding the pitfalls of each. For the experiment, the financial data of 396 Taiwan firms during the period 2002-2003 were selected. The results show that the hybrid approach is a promising alternative to the conventional methods for failure prediction.

A new approach and insightful financial diagnoses for the IT industry based on a hybrid MADM model

“…The findings contribute to the finan- 42 cial applications of decision-making science and computational intelligence in practice. 43 Ó 2015 Published by Elsevier B.V. 44 45 46 47 1. Introduction 48 Financial ratios are widely used for evaluating the competitive- 49 ness and worthiness of a company.…”

“…457 In addition, to validate the trained model, an untouched testing set 458 composed of 100 companies (i.e., condition attributes in 2012 and 459 decision attributes in 2013) was formed in the next time frame by 460 using the similar sampling approach. As suggested in a previous 461 study[43], the RSA generates superior outcomes when the attri-462 butes' domains for continuous variables (e.g., financial ratios in this 463 study) are finite sets of low cardinality (e.g., low, middle, and high). 464 Therefore, a three-level discretization was conducted in the empirfor the condition attributes was conducted by rank-467 ing each attribute, a process called discretization.…”

The worst-practice DEA model with slack-based measurement

“…The applications of DEA-based approaches for particularly evaluating performance in the category of worst-case scenario can only be found in the works of Paradi, Asmild, and Simak (2004), Shuai and Li (2005) and Liu and Chen (submitted for publication). After Paradi et al (2004) introduced the concept of worst practice DEA (but without specific mathematical expression of model), the concept of worst practice DEA was employed in conjunction with rough set theory in the work of Shuai and Li (2005) for dealing with imprecise data which is discussed in a specific category of DEA.…”

“…After Paradi et al (2004) introduced the concept of worst practice DEA (but without specific mathematical expression of model), the concept of worst practice DEA was employed in conjunction with rough set theory in the work of Shuai and Li (2005) for dealing with imprecise data which is discussed in a specific category of DEA. Then Liu and Chen (submitted for publication) developed a radial model of the worst-practice frontier DEA (WPF-DEA).…”

Fuzzy Support Vector Machine for bankruptcy prediction

“…An effective prediction in time is valued priceless for business in order to evaluate risks or prevent bankruptcy [4,5,20]. A fair amount of research has therefore focused on bankruptcy prediction [1,2,6,7,9,10,[13][14][15][16]18,23,25,30,33,[35][36][37][40][41][42][43]45,50,52,53,55,56,58,59,61,63,64,67,69,70,74,81,83]. diction models to deter disastrous consequences of ultimate financial distress.…”