Financial Distress Prediction Using an Artificial Neural Network Integrating a Two-Stage Feature Selection Method

Abstract

Financial distress prediction (FDP) is critical for companies, banks, and investors, and artificial neural networks (ANN) have been proven to be an efficient method for FDP. However, the “curse of dimensionality” in FDP not only increases the computational complexity, but also reduces the prediction accuracy. To solve this problem, this paper takes an ANN model as the basic classifier and presents a new two-stage feature selection method integrated with multiple filters and a wrapper method. The financial data of Chinese listed companies are applied for comparative analysis to verify the effectiveness of the constructed method. The results demonstrate that the proposed method achieves a smaller feature subset and better predictive effect than other methods, thus solving the “curse of dimensionality” more effectively and improving the accuracy. In addition, SHapley Additive exPlanations (SHAP) and Partial Dependence Plots (PDP) are employed to investigate the relative importance of selected features. Their results increase the credibility of the proposed model, giving users more confidence in using this “black box” model.