A Research of Using Decision Tree in Financial Distress Prediction Model for Business Failure
Date Issued
2004
Date
2004
Author(s)
Chou, Shih-Yeh
DOI
zh-TW
Abstract
The purpose of this research is to study the classification ability ofdecision tree models and derive the features of business failure throughclassification rules. This model will not only help the enterprise to modify its operational ways but also help the government to show concern for the crisis enterprises.
Prior researches mostly focus on Dichotomous Classification Test,Regression method and financial variables. Using the firm-level data from 2001, and the data mining software “Answer Tree 2.1” to establishthe Exhaustive CHAID models, this study empirically demonstrates thatdecision tree is a practical tool for prediction of business failure. Addingfinancial and non-financial variables as predictors, we also use regression model to compare with decision model to identify the difference.
The empirical result shows that under the whole sample size, the hitratio of logistic model is higher than that of decision model. In order totest the ratio will decline with the increase of the proportion of failurecompanies, we add the proportion of failure companies to 22%, as a result, and the hit ratio indeed decreases. Based on the empirical findings, wecan draw a conclusion that increasing the proportion of failure companies will lead to the decreasing of the hit ratio.
The significant variables are all the same under the logistic models.Nevertheless, when using decision tree models, it will select the mostsignificant variable as predictor variable. The finding indicates that thesame variable under the two different analysis methods is sales/totalassets.
Subjects
決策樹
財務危機預警
Decision Tree
Financial Distress Prediction Model
Type
other
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