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Methodological comparison between DEA (data envelopment analysis) and DEA-DA (discriminant analysis) from the perspective of bankruptcy assessment

  • Sueyoshi, Toshiyuki
  • Goto, Mika
Registered author(s):

    This study compares DEA (data envelopment analysis) with DEA-DA (discriminant analysis) in terms of bankruptcy assessment. Recently, many DEA researchers propose a use of DEA as a quick-and-easy tool to assess corporate bankruptcy. Meanwhile, other DEA researchers discuss a use of DEA-DA for bankruptcy-based financial analysis. The two groups are very different from the conventional use of DEA because we have long applied DEA to the measurement of operational performance, or productivity analysis. The two research groups open up a new application area (bankruptcy-based financial assessment) for DEA. This study discusses methodological strengths and weaknesses of DEA and DEA-DA from the perspective of corporate failure. The proposed comparative analysis has the three main criteria: (a) how to handle negative data in financial variables, (b) how to handle data imbalance between default and non-default firms, and (c) how to identify a failure process over time. This study finds that DEA is a managerial tool for the initial assessment of corporate failure and DEA is useful for busy corporate leaders and financial managers. In contrast, DEA-DA is useful for researchers and individuals who are interested in the detailed assessment of bankruptcy and its failure process in a time horizon.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0377-2217(08)01017-5
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    Article provided by Elsevier in its journal European Journal of Operational Research.

    Volume (Year): 199 (2009)
    Issue (Month): 2 (December)
    Pages: 561-575

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    Handle: RePEc:eee:ejores:v:199:y:2009:i:2:p:561-575
    Contact details of provider: Web page: http://www.elsevier.com/locate/eor

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    1. Toshiyuki Sueyoshi, 2005. "Financial Ratio Analysis Of The Electric Power Industry," Asia-Pacific Journal of Operational Research (APJOR), World Scientific Publishing Co. Pte. Ltd., vol. 22(03), pages 349-376.
    2. Sinuany-Stern, Zilla & Friedman, Lea, 1998. "DEA and the discriminant analysis of ratios for ranking units," European Journal of Operational Research, Elsevier, vol. 111(3), pages 470-478, December.
    3. Lo, Andrew W., 1986. "Logit versus discriminant analysis : A specification test and application to corporate bankruptcies," Journal of Econometrics, Elsevier, vol. 31(2), pages 151-178, March.
    4. Sueyoshi, Toshiyuki, 2006. "DEA-Discriminant Analysis: Methodological comparison among eight discriminant analysis approaches," European Journal of Operational Research, Elsevier, vol. 169(1), pages 247-272, February.
    5. Warner, Jerold B, 1977. "Bankruptcy Costs: Some Evidence," Journal of Finance, American Finance Association, vol. 32(2), pages 337-47, May.
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    7. Sueyoshi, Toshiyuki, 2004. "Mixed integer programming approach of extended DEA-discriminant analysis," European Journal of Operational Research, Elsevier, vol. 152(1), pages 45-55, January.
    8. Charnes, A. & Cooper, W. W. & Rhodes, E., 1978. "Measuring the efficiency of decision making units," European Journal of Operational Research, Elsevier, vol. 2(6), pages 429-444, November.
    9. Cielen, Anja & Peeters, Ludo & Vanhoof, Koen, 2004. "Bankruptcy prediction using a data envelopment analysis," European Journal of Operational Research, Elsevier, vol. 154(2), pages 526-532, April.
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    15. Sueyoshi, Toshiyuki & Sekitani, Kazuyuki, 2009. "An occurrence of multiple projections in DEA-based measurement of technical efficiency: Theoretical comparison among DEA models from desirable properties," European Journal of Operational Research, Elsevier, vol. 196(2), pages 764-794, July.
    16. Premachandra, I.M. & Bhabra, Gurmeet Singh & Sueyoshi, Toshiyuki, 2009. "DEA as a tool for bankruptcy assessment: A comparative study with logistic regression technique," European Journal of Operational Research, Elsevier, vol. 193(2), pages 412-424, March.
    17. Eisenbeis, Robert A, 1977. "Pitfalls in the Application of Discriminant Analysis in Business, Finance, and Economics," Journal of Finance, American Finance Association, vol. 32(3), pages 875-900, June.
    18. Collins, Robert A. & Green, Richard D., 1982. "Statistical methods for bankruptcy forecasting," Journal of Economics and Business, Elsevier, vol. 34(4), pages 349-354.
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    21. Sueyoshi, Toshiyuki, 1999. "DEA-discriminant analysis in the view of goal programming," European Journal of Operational Research, Elsevier, vol. 115(3), pages 564-582, June.
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