Prediction of firm bankruptcies have been extensively studied in accounting, as all stakeholders in a firm have a vested interest in monitoring its financial performance. This paper presents an exploratory study which compares the predictive capabilities for firm bankruptcy of neural networks and classical multivariate discriminant analysis. The predictive accuracy of the two techniques is presented within a comprehensive, statistically sound framework, indicating the value added to the forecasting problem by each technique. The study indicates that neural networks perform significantly better than discriminant analysis at predicting firm bankruptcies. Implications of our results for the accounting professional, neural networks researcher and decision support system builders are highlighted.

Bankruptcy prediction using neural networks

From a management scientist's perspective, the neural networks offer three opportunities: statistical methods, optimization methods, and a problem domain in which to apply OR algorithms. This annotated bibliography of application literature should offer a nontechnical fast track to someone getting started in this exciting area. The research published thus far on the applications of neural networks for statistical and optimization problems shows promise for the interface of neural networks and management science.

Neural Networks for the MS/OR Analyst: An Application Bibliography

Artificial neural networks are new methods for classification. We investigate two important issues in building neural network models; network architecture and size of training samples. Experiments were designed and carried out on two-group classification problems to find answers to these model building questions. The first experiment deals with selection of architecture and sample size for different classification problems. Results show that choice of architecture and choice of sample size depend on the objective: to maximize the classification rate of training samples, or to maximize the generalizability of neural networks. The second experiment compares neural network models with classical models such as linear discriminant analysis and quadratic discriminant analysis, and nonparametric methods such as k-nearest-neighbor and linear programming. Results show that neural networks are comparable to, if not better than, these other methods in terms of classification rates in the training samples but not in the test samples.

Two-Group Classification Using Neural Networks*

Artificial neural networks (ANN) have a wide ranging usage area in the data classification problems. Backpropagation algorithm is classical technique used in the training of the artificial neural networks. Since this algorithm has many disadvantages, the training of the neural networks has been implemented with the binary and real-coded genetic algorithms. These algorithms can be used for the solutions of the classification problems. The real-coded genetic algorithm has been compared with other training methods in the few works. It is known that the comparison of the approaches is as important as proposing a new classification approach. For this reason, in this study, a large-scale comparison of performances of the neural network training methods is examined on the data classification datasets. The experimental comparison contains different real classification data taken from the literature and a simulation study. A comparative analysis on the real data sets and simulation data shows that the real-coded genetic algorithm may offer efficient alternative to traditional training methods for the classification problem.

Comparing performances of backpropagation and genetic algorithms in the data classification

The assessment of a firm's going concern status is not an easy task. To assist auditors, going concern prediction models based on statistical methods such as multiple discriminant analysis and logit/probit analysis have been explored with some success. This study attempts to look at a different and more recent approach—neural networks. In particular, a neural network model of the feedforward, backpropagation type was constructed to predict a firm's going concern status from six financial ratios, using a data set containing 165 non-going concerns and 165 matched going concerns. On an evenly distributed hold-out sample, the trained network model correctly predicted all 30 test cases. The results suggest that neural networks can be a promising avenue of research and application in the going concern area.

A neural network approach to the prediction of going concern status

The task of classifying observations into known groups is a common problem in decision making. A wealth of statistical approaches, commencing with Fisher's linear discriminant function, and including variations to accomodate a variety of modeling assumptions, have been proposed. In addition, nonparametric approaches based on various mathematical programming models have also been proposed as solutions. All of these proposed aolutions have performed well when conditions favorable to the specific model are present. The modeler, therefore, can usually be assured of a good solution to his problem of he chooses a model which fits his situation. In this paper, the performance of a neural network as a classifier is evaluated. It is found that the performance of the neural network is comparable to the best of otheother methods under a wide variety of modeling assumptions. The use of neural networks as classifiers thus relieves the modeler of testing assumptions which would otherwise be critical to the performance of the usual classification techniques.

A neural network approach to the classification problem

This paper discusses the feasibility of using neural networks as a tool in the fault detection process. A neural network is integrated with a state language programmable logic controller, an important device in an automatic control system. Time series data related to time spent in a state is gathered and used as input into a neural network, for the purpose of identifying when a fault has occurred. A feedforward neural network is used to identify which (if any) of three types of faults may have occurred. Experimental results related to sensitivity and accuracy measures are presented. A brief review of related applications and research is also presented.

Ming S. Hung

Papers

A neural network approach to the classification problem

A neural network model for fault detection in conjunction with a programmable logic controller