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Comparative analysis of failure prediction methods: the Finnish case

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  • Teija Laitinen
  • Maria Kankaanpaa

Abstract

This paper first briefly discusses six alternative methods that have been applied to financial failure prediction: linear discriminant analysis, logit analysis, recursive partitioning, survival analysis, neural networks and the human information processing approach. The main objective was to study empirically whether the results stemming from the use of alternative methods differ from each other. This was conducted using the Finnish data one, two and three years prior to failure in empirical analysis. The results indicated that there was a statistically significant difference in prediction accuracy only between logistic analysis and survival analysis one year prior to failure. Two and three years prior to failure statistically significant differences were not found. The results indicate, with the three variables employed in this study, that no superior method has been found. Even one of the latest applications, neural networks, is in its present form only as effective as discriminant analysis was as early as thirty years ago.

Suggested Citation

  • Teija Laitinen & Maria Kankaanpaa, 1999. "Comparative analysis of failure prediction methods: the Finnish case," European Accounting Review, Taylor & Francis Journals, vol. 8(1), pages 67-92.
  • Handle: RePEc:taf:euract:v:8:y:1999:i:1:p:67-92
    DOI: 10.1080/096381899336159
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    References listed on IDEAS

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    Cited by:

    1. Balcaen S. & Ooghe H., 2004. "Alternative methodologies in studies on business failure: do they produce better results than the classic statistical methods?," Vlerick Leuven Gent Management School Working Paper Series 2004-16, Vlerick Leuven Gent Management School.
    2. Aaro Hazak & Kadri Männasoo, 2007. "Indicators of corporate default : an EU based empirical study," Bank of Estonia Working Papers 2007-10, Bank of Estonia, revised 04 Sep 2007.
    3. Beynon, Malcolm J., 2005. "A novel technique of object ranking and classification under ignorance: An application to the corporate failure risk problem," European Journal of Operational Research, Elsevier, vol. 167(2), pages 493-517, December.
    4. Pasiouras, Fotios & Tanna, Sailesh & Zopounidis, Constantin, 2007. "The identification of acquisition targets in the EU banking industry: An application of multicriteria approaches," International Review of Financial Analysis, Elsevier, vol. 16(3), pages 262-281.

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