Using partial least squares and support vector machines for bankruptcy prediction

Abstract

The evaluation of corporate financial distress has attracted significant global attention as a result of the increasing number of worldwide corporate failures. There is an immediate and compelling need for more effective financial distress prediction models. This paper presents a novel method to predict bankruptcy. The proposed method combines the partial least squares (PLS) based feature selection with support vector machine (SVM) for information fusion. PLS can successfully identify the complex nonlinearity and correlations among the financial indicators. The experimental results demonstrate its superior predictive ability. On the one hand, the proposed model can select the most relevant financial indicators to predict bankruptcy and at the same time identify the role of each variable in the prediction process. On the other hand, the proposed model’s high levels of prediction accuracy can translate into benefits to financial organizations through such activities as credit approval, and loan portfolio and security management.