A combined approach based on robust PCA to improve bankruptcy forecasting
Review of Accounting and Finance
ISSN: 1475-7702
Article publication date: 14 May 2019
Issue publication date: 16 May 2019
Abstract
Purpose
Starting from a series of financial ratios analysis, this paper aims to build up two indices which take into account both the firm’s debt level and its sustainability to investigate if and to what extent the proposed indices are able to correctly predict firms’ financial bankruptcy probabilities.
Design/methodology/approach
The research implements a statistical approach (tandem analysis) based on both an original use of principal component analysis (PCA) and logit model.
Findings
The econometric results are compared with those of the popular Altman Z-score for different lengths of the reference period and with more recent classifiers. The empirical evidence would suggest a good performance of the proposed indices which, therefore, could be used as early warning signals of bankruptcy.
Practical implications
The potential application of the model is in the spirit of predicting bankruptcy and aiding companies’ evaluation with respect to going-concern considerations, among others, as the early detection of financial distress facilitates the use of rehabilitation measures.
Originality/value
The construction of the indebtedness indices is based on an original use of Robust PCA for skewed data.
Keywords
Acknowledgements
The authors are particularly grateful to Nadine Levratto and two anonymous referees for their useful comments and suggestions.
Citation
Succurro, M., Arcuri, G. and Costanzo, G.D. (2019), "A combined approach based on robust PCA to improve bankruptcy forecasting", Review of Accounting and Finance, Vol. 18 No. 2, pp. 296-320. https://doi.org/10.1108/RAF-04-2018-0077
Publisher
:Emerald Publishing Limited
Copyright © 2019, Emerald Publishing Limited