Predicting financial distress using the worst-practice-frontier data envelopment analysis model and artificial neural network

Abstract

PurposeThe main purpose of this paper is to predicate financial distress using the worst-practice-frontier data envelopment analysis (WPF-DEA) model and artificial neural network.Design/methodology/approachIn this study, a neural network technique was used to forecast inputs and outputs in the future time-period. Using a WPF-DEA model, financially distressed companies were identified based on the worst performance, and an improvement solution was provided for those decision-making units.FindingsThis study’s findings show that dynamic WPF-DEA has high predictability in corporate financial distress, and it can be used with high confidence. Based on the future time-period results, JOUSH & OXYGEN was predicted to be a financially distressed company in the two future time-periods.Originality/valueIn recent decades, globalization, technological changes and a competitive space have increased uncertainty in the economic environment. In such circumstances, economic growth certainly depends on correct decision-making and optimal allocation of resources. It can be done by introducing appropriate tools and models for assessing corporate financial conditions, including financial distress and bankruptcy.