What Do Post-Communist Countries Have in Common When Predicting Financial Distress?

Abstract

Business failure prediction is an important issue in corporate finance. Different prediction models are proposed by financial theory and are often used in practice. Their application is effortless, selecting only few key inputs with the greatest informative power from the large list of possible indicators. Our paper identifies the financial distress predictors for 5 post-communist countries (Bulgaria, Croatia, the Czech Republic, Hungary and Romania) based on information collected from the Amadeus database for the period 2011-2013 using CHAID decision trees and neural networks. We propose a short list of indicators, which can offer a synthetic perspective on corporate distress risk, adapted for these countries. The best prediction models are substantially different from country to country: in the Czech Republic, Hungary and Romania the flow-approach indicators perform better, while in Bulgaria and Croatia-the stock-approach indicators. The results suggest that the extrapolation of such models from one country to another should be made cautiously. One interesting finding is the presence of the ratios per employee as predictors of financial distress.

Explanatory Factors of Business Failure: Literature Review and Global Trends

“…Many authors give business failure a legal definition of bankruptcy [48][49][50][51][52][53][54][55][56][57][58][59][60][61]. Others, instead, define business failure as financial difficulties in meeting a company's obligations [62][63][64][65][66][67]. Altman [48] initially considered as examples of business failure those firms that were legally in bankruptcy; in contrast, in a later study conducted in 1988, he indicated as business failure cases those companies that were in a situation of insolvency or inability to meet their obligations.…”

“…It is important to point out that none of these issues was found in the first subperiod, so it can be stated that they cannot be considered decadent. The appearance of financial distress is due to research [6,62,64,[153][154][155] examining the strategies that companies choose when faced with financial difficulties before reaching the stage of financial insolvency or business failure and how such difficulties affect the probability of recovery.…”

Business failure prediction using cart-based model: A case of Slovak companies

“…To prediction, they used 10 different approaches including decision trees C5.0, CART, QUEST and CHAID. In their paper, Popescu and Dragotă (2018) identify the business failure predictors for 5 post-communist countries (Bulgaria, Croatia, the Czech Republic, Hungary and Romania) using CHAID decision tree and neural networks.…”

Mda Financial Distress Prediction Model for Hungarian Companies

“…Among machine learning methods based on artificial intelligence, artificial neural networks and decision trees are the most commonly used techniques [5]. In 2018, Popescu and Dragotă [6] identified the financial distress predictors for five post-communist countries (Bulgaria, Croatia, the Czech Republic, Hungary and Romania) using CHAID decision tree and neural networks. In Slovakia, Gavurova [7] and Karas and Reznakova [8] developed prediction models using decision trees.…”