Title

Predicting financial distress: A comparison of survival analysis and decision tree techniques

Date of this Version

8-21-2015

Document Type

Conference Proceeding

Publication Details

Published version

Gepp, A., & Kumar, K. (2015). Predicting financial distress: A comparison of survival analysis and decision tree techniques. 11th International Conference on Data Mining and Warehousing, (ICDMW), 54, 396-404.

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2015 HERDC submission

Copyright © 2015 The Authors.

Distribution License


This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

ISSN

1877-0509

Abstract

Financial distress and then the consequent failure of a business is usually an extremely costly and disruptive event. Statistical financial distress prediction models attempt to predict whether a business will experience financial distress in the future. Discriminant analysis and logistic regression have been the most popular approaches, but there is also a large number of alternative cutting - edge data mining techniques that can be used. In this paper, a semi-parametric Cox survival analysis model and non-parametric CART decision trees have been applied to financial distress prediction and compared with each other as well as the most popular approaches. This analysis is done over a variety of cost ratios (Type I Error cost: Type II Error cost) and prediction intervals as these differ depending on the situation. The results show that decision trees and survival analysis models have good prediction accuracy that justifies their use and supports further investigation.

 

This document has been peer reviewed.