Human resources and corporate failure prediction modeling: Evidence from Belgium

Abstract

AbstractThis paper analyzes the prediction performance of human resources (HR) variables in corporate failure modeling. We define corporate failure as a two‐phase process from financial distress to bankruptcy, so that we can determine the prediction power of HR variables along a firm's phase in the financial deterioration process. We demonstrate the use of HR variables and their application to a two‐phase corporate failure model, providing first evidence for the predictive power of HR variables. The experimental results, based on real‐world datasets from Belgium, show that HR variables used in conjugation with accounting‐based information improve the accuracy of prediction modeling. However, the predictive power of HR variables varies in different phases of corporate failure with better prediction accuracy during the initial symptoms of corporate failure (i.e., financial distress). Findings show that our proposed model predicted financial distress with 84.1%, whereas the accuracy decreased to 83.3% when predicting bankruptcy. Besides, they also show that, on average, the inclusion of HR variables improves the global accuracy of the prediction models of 3.8% and allows to decrease Type I error of 5%.