What is it about?

Business failure prediction is an important issue in corporate finance. Different prediction models are proposed by financial theory and are often used in practice. Their application is effortless, selecting only few key inputs with the greatest informative power from the large list of possible indicators. Our paper identifies the financial distress predictors for 5 post-communist countries (Bulgaria, Croatia, the Czech Republic, Hungary and Romania) based on information collected from the Amadeus database for the period 2011–2013 using CHAID decision trees and neural networks. We propose a short list of indicators, which can offer a synthetic perspective on corporate distress risk, adapted for these countries. The best prediction models are substantially different from country to country: in the Czech Republic, Hungary and Romania the flow-approach indicators perform better, while in Bulgaria and Croatia – the stock-approach indicators. The results suggest that the extrapolation of such models from one country to another should be made cautiously. One interesting finding is the presence of the ratios per employee as predictors of financial distress.

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Why is it important?

The best prediction models are substantially different from country to country: in the Czech Republic, Hungary and Romania the flow-approach indicators perform better, while in Bulgaria and Croatia – the stock-approach indicators. The results suggest that the extrapolation of such models from one country to another should be made cautiously.

Perspectives

The best prediction models are substantially different from country to country. The extrapolation of such models from one country to another should be made cautiously.

Victor Dragota
Academia de Studii Economice din Bucuresti

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This page is a summary of: What Do Post-Communist Countries Have in Common When Predicting Financial Distress?, Prague Economic Papers, January 2018, University of Economics, DOI: 10.18267/j.pep.664.
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