Logit business failure prediction in V4 countries

Abstract

The paper presents the creation of the model that predicts the business failure of companies operating in V4 countries. Based on logistic regression analysis, significant predictors are identified to forecast potential business failure one year in advance. The research is based on the data set of financial indicators of more than 173 000 companies operating in V4 countries for the years 2016 and 2017. A stepwise binary logistic regression approach was used to create a prediction model. Using a classification table and ROC curve, the prediction ability of the final model was analysed. The main result is a model for business failure prediction of companies operating under the economic conditions of V4 countries. Statistically significant financial parameters were identified that reflect the impending failure situation. The developed model achieves a high prediction ability of more than 88%. The research confirms the applicability of the logistic regression approach in business failure prediction. The high predictive ability of the created model is comparable to models created by especially sophisticated artificial intelligence approaches. The created model can be applied in the economies of V4 countries for business failure prediction one year in advance, which is important for companies as well as all stakeholders.

Keywords

• logit
• business failure
• financial ratios
• prediction model
• v4 countries