Predicting default of a small business using different definitions of financial distress
- 1 April 2012
- journal article
- Published by Taylor & Francis Ltd in Journal of the Operational Research Society
- Vol. 63 (4), 539-548
- https://doi.org/10.1057/jors.2011.65
Abstract
The paper introduces a number of risk-rating models for UK small businesses applying an accounting-based approach, which uses financial ratios to predict corporate bankruptcy. An enhancement to these models is considered through features typical to retail credit risk modelling. A common problem of default prediction consists in the relatively small number of bankruptcies or real defaults available for model-building. In order to expand the ‘default’ group beyond bankrupt companies, the paper considers adopting four different definitions of ‘a failing business’ by investigating combinations of financial distress levels. The impact of each default definition on the choice of predictor variables and on the model's predictive accuracy is explored. In addition, the paper examines the value of categorizing financial ratios used as predictor variables.This publication has 27 references indexed in Scilit:
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