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DEA as a tool for bankruptcy assessment: A comparative study with logistic regression technique

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  • Premachandra, I.M.
  • Bhabra, Gurmeet Singh
  • Sueyoshi, Toshiyuki
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    Abstract

    This paper proposes data envelopment analysis (DEA) as a quick-and-easy tool for assessing corporate bankruptcy. DEA is a non-parametric method that measures weight estimates (not parameter estimates) of a classification function for separating default and non-default firms. Using a recent sample of large corporate failures in the United States, we examine the capability of DEA in assessing corporate bankruptcy by comparing it with logistic regression (LR). We find that DEA outperforms LR in evaluating bankruptcy out-of-sample. This feature of DEA is appealing and has practical relevance for investors. Another advantage of DEA over LR is that it does not have assumptions associated with statistical and econometric methods. Furthermore, DEA does not need a large sample size for bankruptcy evaluation, usually required by such statistical and econometric approaches. The need for such a large sample size is a significant disadvantage to practitioners when investment decisions are made using small samples. DEA can bypass such a difficulty related to a sample size. Thus, DEA is a practically appealing method for bankruptcy assessment.

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    Bibliographic Info

    Article provided by Elsevier in its journal European Journal of Operational Research.

    Volume (Year): 193 (2009)
    Issue (Month): 2 (March)
    Pages: 412-424

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    Handle: RePEc:eee:ejores:v:193:y:2009:i:2:p:412-424

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    Web page: http://www.elsevier.com/locate/eor

    Related research

    Keywords: Bankruptcy Data envelopment analysis Logit regression;

    References

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    Cited by:
    1. du Jardin, Philippe, 2012. "The influence of variable selection methods on the accuracy of bankruptcy prediction models," MPRA Paper 44383, University Library of Munich, Germany.
    2. Sevim, Cuneyt & Oztekin, Asil & Bali, Ozkan & Gumus, Serkan & Guresen, Erkam, 2014. "Developing an early warning system to predict currency crises," European Journal of Operational Research, Elsevier, vol. 237(3), pages 1095-1104.
    3. Premachandra, I.M. & Chen, Yao & Watson, John, 2011. "DEA as a tool for predicting corporate failure and success: A case of bankruptcy assessment," Omega, Elsevier, vol. 39(6), pages 620-626, December.

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