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Performance evaluation of bankruptcy prediction models: An orientation-free super-efficiency DEA-based framework

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  • Mousavi, Mohammad M.
  • Ouenniche, Jamal
  • Xu, Bing

Abstract

Prediction of corporate failure is one of the major activities in auditing firms risks and uncertainties. The design of reliable models to predict bankruptcy is crucial for many decision making processes. Although a large number of models have been designed to predict bankruptcy, the relative performance evaluation of competing prediction models remains an exercise that is unidimensional in nature, which often leads to reporting conflicting results. In this research, we overcome this methodological issue by proposing an orientation-free super-efficiency data envelopment analysis model as a multi-criteria assessment framework. Furthermore, we perform an exhaustive comparative analysis of the most popular bankruptcy modeling frameworks for UK data including our own models. In addition, we address two important research questions; namely, do some modeling frameworks perform better than others by design? and to what extent the choice and/or the design of explanatory variables and their nature affect the performance of modeling frameworks?, and report on our findings.

Suggested Citation

  • Mousavi, Mohammad M. & Ouenniche, Jamal & Xu, Bing, 2015. "Performance evaluation of bankruptcy prediction models: An orientation-free super-efficiency DEA-based framework," International Review of Financial Analysis, Elsevier, vol. 42(C), pages 64-75.
  • Handle: RePEc:eee:finana:v:42:y:2015:i:c:p:64-75
    DOI: 10.1016/j.irfa.2015.01.006
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    References listed on IDEAS

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    1. repec:spr:nathaz:v:87:y:2017:i:3:d:10.1007_s11069-017-2826-2 is not listed on IDEAS
    2. repec:eee:joecas:v:13:y:2016:i:c:p:100-113 is not listed on IDEAS
    3. Campa, Domenico & Camacho-Miñano, María-del-Mar, 2015. "The impact of SME’s pre-bankruptcy financial distress on earnings management tools," International Review of Financial Analysis, Elsevier, vol. 42(C), pages 222-234.
    4. repec:spr:annopr:v:254:y:2017:i:1:d:10.1007_s10479-017-2431-5 is not listed on IDEAS

    More about this item

    Keywords

    Bankruptcy prediction; Performance criteria; Performance measures; Data envelopment analysis; Slacks-based measure;

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • C19 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Other

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