Analyzing the financial distress of Chinese public companies using probabilistic neural networks and multivariate discriminate analysis
Many studies have applied backpropagation feedforward neural networks (BPNNs) as an alternative to multivariate discriminant analysis (MDA) in attempts to predict business distress using relatively small data sets. Although these studies have generally reported the superiority of BPNNs vs. MDA, they seem to ignore the fact that the former suffers from overfitting if the data set is too small compared to the free parameters of the network. We thus suggest an alternative approach that involves use of a probabilistic neural network (PNN). From our study of financially distressed Chinese public companies, we found that both the PNN and MDA algorithms provide good classifications. Relative to MDA, however, the PNN method provides better prediction, and, at the same time, does not require multivariate normality of the data. Our results appear to offer an improvement from those of earlier efforts that employ MDA, BPNN, and other models. In particular, PNN was here able to predict company distress with greater than 87.5% short-term accuracy, and 81.3% medium-term accuracy.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Zhang, Guoqiang & Y. Hu, Michael & Eddy Patuwo, B. & C. Indro, Daniel, 1999. "Artificial neural networks in bankruptcy prediction: General framework and cross-validation analysis," European Journal of Operational Research, Elsevier, vol. 116(1), pages 16-32, July.
- Fehle, Frank & Tsyplakov, Sergey, 2005. "Dynamic risk management: Theory and evidence," Journal of Financial Economics, Elsevier, vol. 78(1), pages 3-47, October.
- Hutchison, Michael & McDill, Kathleen, 1999.
"Are All Banking Crises Alike? The Japanese Experience in International Comparison,"
Journal of the Japanese and International Economies,
Elsevier, vol. 13(3), pages 155-180, September.
- Hutchison, M. & McDill, K., 1998. "Are All Banking Crises Alike? The Japanese Experience in International Comparison," Papers 99-02, Economisch Institut voor het Midden en Kleinbedrijf-.
- Michael Hutchison & Kathleen McDill, 1999. "Are All Banking Crises Alike? The Japanese Experience in International Comparison," NBER Working Papers 7253, National Bureau of Economic Research, Inc.
- Michael Hutchison & Kathleen McDill, 1999. "Are all banking crises alike? The Japanese experience in international comparison," Pacific Basin Working Paper Series 99-02, Federal Reserve Bank of San Francisco.
- Cooper, W. W. & Deng, Honghui & Gu, Bisheng & Li, Shanling & Thrall, R. M., 2001. "Using DEA to improve the management of congestion in Chinese industries (1981-1997)," Socio-Economic Planning Sciences, Elsevier, vol. 35(4), pages 227-242, December.
- Hoshi, Takeo & Kashyap, Anil & Scharfstein, David, 1990. "The role of banks in reducing the costs of financial distress in Japan," Journal of Financial Economics, Elsevier, vol. 27(1), pages 67-88, September.
- Takeo Hoshi & Anil Kashyap & David Scharfstein, 1990. "The Role of Banks in Reducing the Costs of Financial Distress in Japan," NBER Working Papers 3435, National Bureau of Economic Research, Inc.
- Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 23(4), pages 589-609, 09.
- 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.
- Kar Yan Tam & Melody Y. Kiang, 1992. "Managerial Applications of Neural Networks: The Case of Bank Failure Predictions," Management Science, INFORMS, vol. 38(7), pages 926-947, July.
- Meyer, Paul A & Pifer, Howard W, 1970. "Prediction of Bank Failures," Journal of Finance, American Finance Association, vol. 25(4), pages 853-868, September. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:eee:soceps:v:42:y:2008:i:3:p:206-220. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.