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O.R. Applications

**Multi-group discrimination using multi-criteria analysis: Illustrations from the ﬁeld of ﬁnance q
**

Constantin Zopounidis *, Michael Doumpos

Financial Engineering Laboratory, Department of Production Engineering and Management, Technical University of Crete, University Campus, Chania 73100, Greece Received 28 February 2001; accepted 2 May 2001

Abstract The primary objective in the discrimination problem is to assign a set of alternatives into predeﬁned classes. During the last two decades several new approaches, such as mathematical programming, neural networks, machine learning, rough sets, multi-criteria decision aid (MCDA), etc., have been proposed to overcome the shortcomings of traditional, statistical and econometric techniques that have dominated this ﬁeld since the 1930s. This paper focuses on the MCDA approach. A new method to achieve multi-group discrimination based on an iterative binary segmentation procedure is proposed. Five real world applications from the ﬁeld of ﬁnance (credit cards assessment, country risk evaluation, credit risk assessment, corporate acquisitions, business failure prediction) are used to illustrate the eﬃciency of the proposed method as opposed to discriminant analysis. Ó 2002 Elsevier Science B.V. All rights reserved.

Keywords: Discrimination; Multicriteria decision aid; Preference disaggregation; Financial decision making

1. Introduction Decision making problems may involve the choice of an alternative solution, the ranking of the alternatives from the best to the worst ones or the discrimination between the alternatives belonging into diﬀerent classes (groups). The former two problematics (choice, ranking) are based on

q A ﬁrst draft of this paper has been presented at the EURO XVI Conference, Brussels, July 12–15, 1998. * Corresponding author. Tel.: +30-821-37236; fax: +30-82169410. E-mail address: kostas@ergasya.tuc.gr (C. Zopounidis).

relative judgments among the considered alternatives (i.e., each alternative is compared to the others to determine a preference relation), while discrimination involves absolute judgments. In this case, a discrimination rule must be determined to decide upon the classiﬁcation of the alternatives on the basis of their comparison with some reference points corresponding to each class (i.e., proﬁles, thresholds). Discrimination problems are very common in several ﬁelds of ﬁnance, including bankruptcy prediction, credit granting, corporate mergers and acquisitions, country risk evaluation, venture capital investments, portfolio selection and management, etc. In all these cases, performing relative

0377-2217/02/$ - see front matter Ó 2002 Elsevier Science B.V. All rights reserved. PII: S 0 3 7 7 - 2 2 1 7 ( 0 1 ) 0 0 3 6 0 - 5

using mathematical programming techniques it is possible to estimate an additive utility function (or any other form of aggregation model) that minimizes the diﬀerences between the decision maker’s classiﬁcation on the reference set that is employed. the works of Freed and Glover (1981a. The ﬁrst MCDA discrimination methods appeared in the late 1970s and the early 1980s with the works of Roy and Moscarola (1977) and Roy (1981) on the outranking relations approach for trichotomic discrimination problems. and the work of Pawlak (1982) on the rough set theory. Rough sets have also attracted the inter- est of many MCDA researchers. the proﬁles that distinguish the classes. the use of a reference set of alternatives for parameter estimation. In contrast to the goal programming approach. for a comprehensive review). Zopounidis. For instance. while the major thrust on the development of outranking relations discrimination techniques became from the work of Yu (1992) on the ELECTRE TRI method. the primary interest of a credit analyst is to discriminate among viable and non-viable ﬁrms.b) on goal programming techniques. diﬀerence/ indiﬀerence/veto thresholds.. Their restrictions (see Altman et al. the work of Devaud et al. serves as an example of how the decision maker evaluates the alternatives under consideration in order to achieve their classiﬁcation. Doumpos / European Journal of Operational Research 139 (2002) 371–389 judgments to determine the competitive level among the considered alternatives (ﬁrms. The MCDA has gained signiﬁcant recognition among operations researchers/management scientists as a powerful approach to analyze complex decision problems that involve multiple and usually conﬂicting criteria and/or goals. (1994) for the ELECTRE II method. for a detailed discussion). venture capital investments. Then. for a review of the rough sets approach to the multiattribute sorting problem).) provides little information to the decision maker. The ELECTRE TRI method (a representative example of MCDA sorting method based on the outranking relations approach) requires the speciﬁcation of a signiﬁcant amount of parameters such as criteria’s weights. the developed additive utility functions are piecewise linear. and signiﬁcant advances have been made both on extending their preference modeling capabilities. The major practical interest of the discrimination problem has motivated researchers in proposing an arsenal of methods for studying it. Among the attempts made. and . unless a speciﬁc conclusion on their viability is determined. in order to develop discrimination models that could accurately discriminate among the considered groups of alternatives. Generally. Recently Mousseau and Slowinski have proposed a methodology that implements the preference disaggregation philosophy to estimate the parameters used to construct an outranking relation through the ELECTRE TRI method. Preference disaggregation analysis (Pardalos et al. the general approach of preference disaggregation analysis provides a ﬂexible framework for supporting the parameter estimation process of alternate MCDA methods such as the ones based on the outranking relation concept. along with the advances in other ﬁelds such as operations research and artiﬁcial intelligence. thus providing a theoretical advantage in cases where the considered classes are not linearly separable (most goal programming formulations lead to the development of a linear discriminant function). led many researchers to explore the development of alternative discrimination approaches. as well as on their extension to study choice and ranking problems (see Pawlak and Slowinski (1994). Furthermore.372 C. (1981). preference disaggregation analysis leads to the development of additive utility functions that serve as discrimination models used to decide upon the classiﬁcation of the alternatives. in credit granting. 1995) provides an alternative multi-criteria approach to study discrimination problems. Concluding that a ﬁrm a is better than a ﬁrm b is of no use to the credit analyst. logit analysis and probit analysis have dominated this ﬁeld at least until the 1980s. M. the MCDA discrimination methods based on goal programming have evolved signiﬁcantly (see Stam (1997). stocks. Since then. etc. (1980) on the preference disaggregation approach. countries. Multivariate statistical and econometric techniques such as discriminant analysis. In its most common form. a signiﬁcant part is devoted on the development of multicriteria decision aid (MCDA) discrimination methods. A similar approach has also been used by Kiss et al. etc.

2. . the maximization of the clarity (sharpness) of the discrimination obtained after the previous two steps is sought (L1 -norm). . Each alternative is described (evaluated) along a set of m evaluation criteria G ¼ fg1 . where the term ‘‘optimal’’ refers to the total number of misclassiﬁcations and to the clarity of the obtained discrimination. for each evaluation T criterion the set Vi ¼ a gi ðaÞ ¼ fgi1 . the features. The method leads to the development of a set of additive utility functions.). Finally.1. the subsequent discussion of the method will be focused on increasing preference criteria (decreasing preference criteria can be treated as increasing preference criteria. and the mathematical programming formulations that are employed to develop the ‘‘optimal’’ discrimination model. gipi g is 2. and business failure prediction). On the basis of the estimated decision model developed through this approach. Zopounidis. The subsequent sections describe in more details both the iterative binary segmentation procedure. . The rest of the paper is organized as follows. It incorporates three diﬀerent measures of the obtained discrimination quality. and then proceeding to the discrimination among the alternatives belonging into the other groups. . Model formulation Let A ¼ fa1 . in order to achieve the ‘‘optimal’’ discrimination both in terms of the number of misclassiﬁcations. gm g. the mathematical formulation. company mergers and acquisitions. The performance of the method is illustrated in Section 3 through ﬁve applications in the ﬁeld of ﬁnancial management (credit cards assessment. . Recent works towards this research direction have been presented by JacquetLagrze (1995) and Zopounidis and Doumpos e (1998. g2 . In a second step the method seeks whether a ‘‘rearrangement’’ of the classiﬁcation errors that occur after the ﬁrst step is possible so that the total number of misclassiﬁcations is minimized (L0 -norm). as well as the operation of the proposed method. Following the methodological framework of preference disaggregation analysis in MCDA. . The method employs an iterative binary segmentation procedure to determine the class in which the alternatives belong. 2. Doumpos / European Journal of Operational Research 139 (2002) 371–389 373 the estimated classiﬁcation that is determined through the developed utility function. etc. According to the set A of alternatives. The evaluation of an alternative a on criterion gi is denoted as gi ðaÞ. Finally.C. . as well as in terms of the clarity (sharpness) of the discrimination. M. an interactive dialog with the decision maker can then be established in order to further calibrate the model so as it represents the decision makers’ preferential system as consistently as possible. . C2 is preferred to C3 . though a simple sign reversal transformation). in distance terms (L1 -norm). this paper presents a new method for multigroup discrimination problems. The set G may include criteria of both increasing and decreasing preference. . Without loss of generality. . It distinguishes the groups progressively. This binary segmentation procedure leads to the development of a decision tree that facilitates the decision regarding the classiﬁcation of the alternatives. a2 . . The multi-group iterative binary segmentation procedure The proposed multiple criteria discrimination method is a non-parametric approach to study discriminant problems involving two or more ordered groups of alternatives. . which are used to decide upon the classiﬁcation of each alternative into a speciﬁc group. Section 4 concludes the paper and outlines some possible future research directions. an g be a set of n alternatives to be classiﬁed into q ordered classes C1 1 C2 1 Á Á Á 1 Cq (C1 is preferred to C2 . the method may be summarized in the following two aspects: 1. 1999). country risk. credit risk evaluation. the minimization of the classiﬁcation error is performed. gi2 . The additive utility functions are estimated through the solution of three mathematical programming formulations (two linear and one mixed-integer). Section 2 presents in detail the basic characteristics. Initially. starting by discriminating the ﬁrst group (best alternatives) from all the others. The major features of .

. The alternatives that are found to belong into class C1 (correctly or incorrectly) are excluded from further consideration. all the alternatives that are found to belong into class C2 (correctly or incorrectly) are excluded from further consideration. on the comparison of the utility of classifying a into C1 as opposed to the utility of classifying a into C2 . Throughout this iterative binary segmentation procedure. it rather serves as a measure of the conditional similarity of an alternative a to the characteristics of the category Ck .jþ1 8gi 2 G: uCk ½gi ðaÞ i Thus. According to this assumption the following general classiﬁcation rule is imposed: The classiﬁcation of an alternative a into one of the predeﬁned classes C1 1 C2 1 Á Á Á 1 Cq should be determined on the basis of the utilities of the corresponding alternative decisions. The classiﬁcation decision with the maximum utility is chosen. while on the other hand the marginal utility of a decision concerning the classiﬁcation of an alternative.2. . into a group lower than Ck (denoted as u$Ck ðgi Þ) will be a decreasing function i on the criterion’s scale (Fig. can be expressed in mathematical terms through the following constraints: uCk ðgi1 Þ ¼ 0. it is assumed that the decision maker’s preferences are monotone functions (increasing or decreasing) on the criteria’s scale. i i u$Ck ðgijþ1 Þ < u$Ck ðgij Þ: i i These constraints may be simpliﬁed by introducing a small positive constant t as the lower bound of the diﬀerence of the marginal utilities among the consecutive values gij and gijþ1 : wCk ¼ uCk ðgijþ1 Þ À uCk ðgij Þ. 1). i i ij.jþ1 wCk P t ij. when the choice among Ck and all the lower (worse) categories Ckþ1 . This utility function does not indicate the overall performance of an alternative with regard to all the evaluation criteria. Zopounidis. M.) Once again. i uCk ðgijþ1 Þ > uCk ðgij Þ. . i denotes the marginal (partial) where utility of the decision concerning the classiﬁcation of an alternative a into group Ck according to criterion gi . The segmentation process The method proceeds progressively in the classiﬁcation of the alternatives into the predeﬁned classes. .jþ1 and w$Ck P t ij. 1. the decision regarding the classiﬁcation of this alternative into a higher (better) class is more favorable to the decision regarding the classiﬁcation of the alternative into a lower (worse) class. Denoting as gij and gijþ1 two consecutive values of criterion gi (gijþ1 > gij . 2. Doumpos / European Journal of Operational Research 139 (2002) 371–389 m X i¼1 deﬁned. The utility of a decision concerning the classiﬁcation of an alternative a into group Ck can be expressed in the form of an additive utility function: U Ck ðaÞ ¼ uCk ½gi ðaÞ 2 ½0. i u$Ck ðgipi Þ ¼ 0. that is. and the same procedure continues until all alternatives have been classiﬁed into the predeﬁned classes. C4 . consisting of the pi diﬀerent values of criterion gi (gi1 is the smallest value and gipi is the largest one). . starting by discriminating among the alternatives of the ﬁrst class C1 (best alternatives) and the alternatives belonging into the other classes.374 C. 8gi 2 G). In a second stage the objective is to discriminate among the alternatives of the second class C2 and the alternatives belonging into the remaining classes (C3 . The aforementioned assumption regarding the monotonicity of the decision maker’s preferences on the criteria scale implies that uCk ðgi Þ will be an i increasing function on the criterion’s scale. . etc. according to criterion gi .jþ1 w$Ck ¼ u$Ck ðgij Þ À u$Ck ðgijþ1 Þ. . i i ij. the monotonicity of the marginal utilities. This assumption implies that as the evaluation of an alternative on a criterion increases. Cq is considered. the marginal utility of criterion gi at point gij can be calculated through the following formulas: .

at each stage k of the binary segmentation procedure ðk ¼ 1. . at each stage of the binary segmentation procedure. . 2. Doumpos / European Journal of Operational Research 139 (2002) 371–389 375 Fig. 2. (denoted as U $Ck ðaÞ). two utility functions are constructed. Zopounidis. This analysis can be based on the examination of the marginal utilities C $C ui j ½gi ðaÞ and ui j ½gi ðaÞ to determine how the .1. while the second one corresponds to the utility of a decision concerning the non-classiﬁcation of an alternative a into class Ck . 2. Based on these two utility functions the aforementioned general classiﬁcation rule can be expressed as follows: if U Ck ðaÞ > U $Ck ðaÞ.3. The ﬁrst one corresponds to the utility of a decision concerning the classiﬁcation of an alternative a into class Ck (denoted as U Ck ðaÞ). The estimation of these utility functions is accomplished through mathematical programming techniques. Marginal utility functions. 2ðq À 1Þ additive utility functions must be estimated. q À 1Þ. 2. 1.C. . M.3. to achieve the correct classiﬁcation of two alternatives a 2 Ck and b 62 Ck at stage k (cf. More speciﬁcally. the estimated utility functions should satisfy the following constraints: U Ck ðaÞ > U $Ck ðaÞ and U Ck ðbÞ < U $Ck ðbÞ: The case where U Ck ðaÞ ¼ U $Ck ðaÞ can only appear when the additive utility functions are used to classify alternatives that have not been considered during the model building process (extrapolation). Although this situation is rare. 2).lþ1 Clearly. then a 62 Ck : ð1Þ performance of the alternatives on each of the evaluation criterion aﬀects their classiﬁcation. its occurrence indicates that the classiﬁcation of the alternatives is not clear and additional analysis is required. the overall iterative binary segmentation procedure is presented in Fig. Fig. jÀ1 X l¼1 pi À1 X l¼j uCk ðgij Þ ¼ i wCk il. two linear programs and one mixed-integer program are solved to estimate ‘‘optimally’’ the two additive utility functions. LP1: Minimizing the overall classiﬁcation error According to the classiﬁcation rule (1). Estimation of utility functions To achieve the classiﬁcation of the alternatives into q classes using the aforementioned iterative binary segmentation procedure. if U Ck ðaÞ < U $Ck ðaÞ. then a 2 Ck .lþ1 and u$Ck ðgij Þ ¼ i w$Ck : il. Following the classiﬁcation rule (1). .

1.jþ1 ¼ 1. then the corresponding alternatives are misclassiﬁed (a is classiﬁed into a lower group than Ck and b is classiﬁed into Ck ). while constraints (5) are normalization constraints ensuring that the global utility of an alternative will be in the interval ½0. there exist some alternatives a 2 A for which eðaÞ > 0. The classiﬁcation errors in this case are eðaÞ ¼ U $Ck ðaÞ À U Ck ðaÞ þ s and eðbÞ ¼ U Ck ðbÞ À U $Ck ðbÞ þ s. the initial linear program (LP1) to be solved can be formulated as follows: X X min F ¼ eðaÞ þ eðbÞ s:t: U Ck ðaÞ À U $Ck ðaÞ þ eðaÞ P s 8a 2 Ck . wij. Consequently. M. i j i j ð3Þ ð4Þ ð5Þ eðaÞ. Zopounidis. w$Ck P t. This is achieved through a mixed-integer programming . wCk P t. a small positive real number s may be used as follows: U Ck ðaÞ À U $Ck ðaÞ P s and U $Ck ðbÞ À U Ck ðbÞ P s: If these constraints are not satisﬁed. s. MIP: Minimizing the number of misclassiﬁcations If after the solution of LP1.jþ1 ij.jþ1 XX C X X $C k k wij. Since. 2.3.jþ1 ¼ 1. The iterative binary segmentation procedure. U $Ck ðbÞ À U Ck ðbÞ þ eðbÞ P s ð2Þ 8b 62 Ck . However. t P 0: Constraints (4) are used to ensure the monotonicity of the marginal utilities. ij.376 C. in linear programming it is not possible to use strict inequality constraints. Doumpos / European Journal of Operational Research 139 (2002) 371–389 Fig. it may be possible to achieve a ‘‘rearrangement’’ of the classiﬁcation errors that leads to the reduction of the total number of misclassiﬁcations. 2.2. then obviously these alternatives are misclassiﬁed.

X X $C XX C k k wij. Clearly. U ðaÞ À U ðaÞ 6 0 U $Ck ðbÞ À U Ck ðbÞ 6 0 8a. the correct classiﬁcation of some alternatives may have been ‘‘marginal’’.3. then alternative a is misclassiﬁed. U ðaÞ À U U $Ck Ck $Ck Ck ðaÞ þ IðaÞ P s 8a 2 Ck 8b 62 Ck ðbÞ À U ðbÞ þ IðbÞ P s 8a. M. P t. b 2 MIS0 . then alternative a is correctly classiﬁed. 1 or 2. wij. t P 0: The ﬁrst set of constraints (8) involves only the correctly classiﬁed alternatives. 8a 62 Ck . although they are correctly classiﬁed. The integer variables IðaÞ can take three possible values: 0. Since MIP formulations are diﬃcult to solve. IðaÞ integer: The ﬁrst set of constraints (6) ensures that all correct classiﬁcations achieved by solving LP1 are retained. The second set of constraints (9) involves the misclassiﬁed alternatives and it is used to ensure that they will be retained as misclassiﬁed. b 2 MIS. their global utilities according to the two developed utility functions may have been very close. LP2 can be formulated as follows: max s:t: d U Ck ðaÞ À U $Ck ðaÞ À d P s 8a 2 Ck U $Ck ðbÞ À U Ck ðbÞ À d P s 8b 62 Ck 8a. s. wij. through the maximization of the minimum diﬀerence between the global utilities of the correctly classiﬁed alternatives achieved according to the two utility functions. LP2: Maximizing the minimum distance Through the solution of LP1 and MIP the ‘‘optimal’’ classiﬁcation of the alternatives is achieved. However. where the term ‘‘optimal’’ refers to the minimization of the total number of misclassiﬁed alternatives. If IðaÞ ¼ 0. the MIP formulation used in the proposed binary segmentation procedure. 8a 2 Ck and U Ck ðaÞ À U $Ck ðaÞ 6 1 À s.jþ1 ¼ 1.jþ1 i Ck $Ck s:t: U ðaÞ À U $Ck ðaÞ P s Ck 8a 2 Ck 8b 62 Ck ð6Þ U $Ck ðbÞ À U Ck ðbÞ P s 8a. while in the later case U $Ck ðaÞ À U Ck ðaÞ > 1 À s. The MIP formulation is the following: X min F ¼ ½IðaÞ þ IðbÞ 8a. t P 0. this second case should be avoided if possible (the classiﬁcation error in this case is severe). 8a 62 Ck . On the contrary.jþ1 ¼ 1. Similarly to MIP. The objective of LP2 is to clarify the obtained classiﬁcation. w$Ck ij.C. The second set of constraints (7) applies only to alternatives that were misclassiﬁed by LP1. while retaining all the correct classiﬁcations. In these constraints d represents the minimum absolute diﬀerence between the global utilities of each alternative according to the two utility functions. b 2 COR. 8a 2 Ck and 8a 2 Ck 8b 62 Ck ð9Þ P t.b2MIS U Ck ðaÞ À U $Ck ðaÞ > 1 À s. and setting IðaÞ ¼ 2 provides the model with the ability to distinguish among these two situations.jþ1 i P t. Let COR be the set of correctly classiﬁed alternatives after solving LP1. and MIS0 be the set of misclassiﬁed alternatives. P t.jþ1 d.jþ1 ¼ 1. . 2.3. if IðaÞ ¼ 1 or IðaÞ ¼ 2.jþ1 ¼ 1. and MIS be the set of misclassiﬁed alternatives for which eðaÞ > 0. with the only diﬀerence being the transformation of the continuous error variables e of LP1 (classiﬁcation errors) into integer error variables I indicating whether an alternative is misclassiﬁed or not.jþ1 ð7Þ wCk ij. let COR0 be the set of correctly classiﬁed alternatives after solving LP1 and MIP. wCk ij. b 2 COR0 . Zopounidis. especially in cases where the number or integer variables is large. j i j w$Ck ij. that is. Their meaning is similar to the constraints (2) and (3) in LP1. X X $C XX C k k wij. thus reducing the computational eﬀort required to obtain a solution. j i j ð8Þ s P 0. Doumpos / European Journal of Operational Research 139 (2002) 371–389 377 formulation (MIP). The diﬀerence between these two situations (IðaÞ ¼ 1 and IðaÞ ¼ 2) is that in the former case U $Ck ðaÞ À U Ck ðaÞ 6 1 À s. considers only the misclassiﬁcations that occur through the solution of LP1. This reduces signiﬁcantly the number of integer variables (integer variables are associated to each misclassiﬁed alternative).

The ﬁrst year prior to acquisition is used as the reference set to develop a model that discriminates between acquired and non-acquired ﬁrms. A similar approach is also used in for the prediction of corporate acquisitions. Three years data are employed in this case study. Applications Five applications from the ﬁeld of ﬁnance are presented in this section to illustrate the ability of . solvency/liquidity. The ﬁnancial position of the ﬁrms is described along 12 ﬁnancial ratios (proﬁtability. and (5) business failure prediction. If gi ðaÞ 2 Vi then the marginal utility ð$ÞC ui k ½gi ðaÞ is already known (the notation ($) is used to consider the pair of utility functions developed at stage k of the binary segmentation proð$ÞC cess). The applications are classiﬁed into three groups. the two ﬁrst additive utility functions U C1 ðaÞ and U $C1 ðaÞ are used to determine whether an alternative a belongs into group C1 or not. Zopounidis. the partial value (marginal utility) of this alternative on each one of the evaluation criteria must be determined. Data and methodology The ﬁve ﬁnancial applications that are considered involve a variety of sample sizes and characteristics. 2. described along seven evaluation criteria (six qualitative and one quantitative). In country risk evaluation 143 countries are considered and classiﬁed into four groups according to their economic performance (high income economies – C1 . Three years data involving 10 ﬁnancial characteristics (ratios) of 30 non-acquired and 30 acquired ﬁrms are considered (groups C1 and C2 . These applications involve the following problems: (1) credit cards assessment. If U C2 ðaÞ > U $C2 ðaÞ then a 2 C2 and the procedure stops. lower-middle income economies – C3 . (3) credit risk assessment. if gi ðaÞ 62 Vi then ui k ½gi ðaÞ can be estimated through linear interpolation. i.. To estimate the global utility of a new alternative a. The most recent one is used as the reference set to develop the appropriate discrimination model. acceptable (C1 ). In credit cards assessment 150 credit card applications are considered. 3.e.1. rejectable (C3 ). upper-middle income economies – C2 .4. are not considered. On the contrary. the proposed approach to support the study of complex real world discrimination problems.378 C. and the procedure continues in the same way until the classiﬁcation of the new alternative is achieved. Model extrapolation The classiﬁcation of a new alternative a 62 A is achieved by descending the decision tree of Fig.e. (2) country risk evaluation. respectively). Doumpos / European Journal of Operational Research 139 (2002) 371–389 Having solved the three aforementioned mathematical programming formulations. while the two previous years are used to test its extrapolating ability. including all the alternatives for which their speciﬁc classiﬁcation is not yet determined. k ¼ q À 1) then the procedure stops. According to the set A0 the values of pi . M. A comparison with discriminant analysis (DA) and the UTADIS MCDA sorting method is also performed.. while the previous two years prior to acquisition are used to test the extrapolating ability 3. while if U C2 ðaÞ < U $C2 ðaÞ then a 62 C2 . Consequently. and the procedure proceeds in solving once again LP1. In this stage all the alternatives that were found in the previous stage to belong into group Ck . where the aim is to discriminate among the alternatives belonging into group Ckþ1 and the alternatives belonging into all the other lower groups Cj ðj > k þ 1Þ. a new set A0 of alternatives is formed.e. the ﬁnancially sound ﬁrms (C1 ). i. If U C1 ðaÞ > U $C1 ðaÞ then a 2 C1 and the procedure stops. 2. applications requiring further investigation (C2 ). if k < q À 1 then the procedure proceeds to stage k þ 1. low-income economies – C4 ) following the methodology employed by the World Bank. Otherwise. and managerial performance ratios). gi1 and gipi are updated. The credit risk assessment problem involves the classiﬁcation of 60 ﬁrms into two groups. Twelve economic indices are used as evaluation criteria. (4) prediction of corporate acquisitions.. and if stage k is the last stage of the binary segmentation procedure (i. and the ﬁrms facing ﬁnancial problems (C2 ). MIP and LP2. while if U C1 ðaÞ < U $C1 ðaÞ then a 62 C1 and the procedure proceeds with the consideration of the next pair of utility functions U C2 ðaÞ and U $C2 ðaÞ . Initially.

Both samples include equal number of non-failed (category C1 ) and failed ﬁrms (category C2 ). More details on these applications can be found in Zopounidis et al.. the solution of LP1 resulted into two misclassiﬁcations. (1997) and Dimitras et al. )2.e. since in all these three problems there are only two classes. the iterative binary segmentation process consists of multiple stages. Pentaraki (1998). (1998).2. )2. Presentation of results The application of the iterative binary segmentation procedure in credit risk evaluation and corporate acquisition resulted to the correct classiﬁcation of all the alternatives (ﬁrms) that were considered during the model development process (i. the solution of MIP was not necessary since there were no misclassiﬁcations. In country risk evaluation the iterative binary segmentation process consists of three stages: in the ﬁrst stage the discrimination among the countries belonging into the high-income economies group and the countries belonging into the rest of the classes is performed. Similarly to the applications involving the credit risk assessment problem and the prediction of corporate mergers and acquisitions. year )1). All ﬁrms are evaluated along a set of 12 ﬁnancial ratios. )4 and )5 prior to failure) and for a three-year period in the case of the holdout sample (years )1. The subsequent solution of MIP did not change this classiﬁcation of the ﬁrms.C. the iterative binary segmentation process consists of only one stage. This form of information is available for a ﬁve-year period in the basic sample (years )1. Doumpos / European Journal of Operational Research 139 (2002) 371–389 379 of the developed model. M. Thus. Zopounidis. Slowinski et al. the data of the ﬁrms of the basic sample for the ﬁrst year prior to failure (year )1) are used to develop the appropriate business failure prediction model. while stage 2 discriminates between the credit card applications requiring further investigation and the rejectable applications. the developed models classiﬁed correctly all the ﬁrms in the most recent year of the analysis. In the second Table 1 Samples characteristics in the ﬁve case studies Case study Alternatives Criteria Alternatives per group C1 Credit cards Country risk Credit risk Corporate acquisitions Business failure prediction 150 143 60 60 80 (basic sample) 38 (holdout sample) 7 12 12 10 12 74 31 30 30 40 C2 52 21 30 30 40 C3 24 42 – – – C4 – 49 – – – . In the case of business failure prediction. and two additive utility functions are developed. Furthermore. while the evaluation criteria that are considered are illustrated in Appendix A. In credit cards assessment it consists of two stages: stage 1 discriminates among the acceptable credit card applications and all the others. )3. (1999). and )3 prior to failure). The remaining four years of the basic sample and the three years of the holdout sample are used to validate the eﬃciency of the developed model in providing helpful decision support in estimating the business failure risk. and among the non-failed and the failed ﬁrms in business failure prediction. while the second sample (holdout sample) consists of 38 ﬁrms used for model validation. Doumpos and Zopounidis (1998). These functions are used to discriminate among the ﬁnancially sound ﬁrms and the ﬁrms facing ﬁnancial problems (in the credit risk assessment problem). Table 1 summarizes the characteristics of the samples used in each application. in business failure prediction two samples of ﬁrms are considered. Concerning the other two applications. The ﬁrst one (basic sample) includes 80 ﬁrms used during model development. Finally. 3. among acquired and non-acquired ﬁrms (in the corporate acquisition problem). the credit cards assessment problem and the evaluation of country risk.

The solution of LP2 does not aﬀect the classiﬁcation accuracy but it clariﬁes the obtained classiﬁcation. In credit cards assessment there are two credit card applications that are misclassiﬁed (overall classiﬁcation accuracy 98. while in country risk evaluation there is one misclassiﬁed country (overall classiﬁcation accuracy 99. Thus the procedure ends with the solution of LP2. Since there is only one misclassiﬁcation MIP is not solved. although in an incorrect way. The pair of additive utility functions developed after solving MIP increases the classiﬁcation accuracy to 98. the iterative binary segmentation procedure. credit card applications. Then. Finally. In the second stage of the binary segmentation process. This is evident from the classiﬁcation accuracy obtained in credit cards assessment and country risk evaluation (the corresponding samples are used only for model development purposes). solving LP1 results to one misclassiﬁed country. China is ignored during the third stage of the binary segmentation process. The elements on the diagonal correspond to the correct classiﬁcations (classiﬁcation accuracy). The retained misclassiﬁcations involve the C1 ! C2 _ C3 misclassiﬁcation and one of the C2 ! C1 misclassiﬁcations. the initially misclas- siﬁed acceptable credit card application is treated as an application requiring further consideration. as well as from the classiﬁcation accuracy (100%) that is obtained in year )1 in credit risk assessment and corporate acquisitions. the solution of LP1 classiﬁes correctly all the credit card applications. . In business failure prediction. which is classiﬁed into the group of upper-middle income economies while belonging in the group of low-income economies.e.33%).. which are then extrapolated on the data of the ﬁrms in years )2 and )3. Appendix B illustrates the additive utility functions developed for each of the ﬁve applications. Zopounidis. which involves only four integer variables corresponding to the aforementioned misclassiﬁcations. According to the obtained results it is clear that the iterative binary segmentation procedure is able to provide high classiﬁcation accuracy (overall accuracy) in the sample used for model development. Bearing in mind this remark. proceeds to the solution of MIP. M. The discrimination procedure is simpler in the country risk evaluation problem. In the second stage. In the ﬁrst stage there are no misclassiﬁcations.67% (two of the initially four misclassiﬁed credit card applications are classiﬁed correctly). along with the corresponding discrimination rules. it should be pointed out that year )1 (most recent year) is used to develop the appropriate discrimination models. The later misclassiﬁcation (C2 ! C1 ) will be ignored in the next stage of the binary segmentation process.380 C. In both credit cards assessment and country risk evaluation. while the other three misclassiﬁcations are of the type C2 ! C1 (applications requiring further consideration are classiﬁed as acceptable ones). It is interesting to examine how these errors evolve during the iterative binary segmentation process. since the classiﬁcation of the corresponding credit card application is speciﬁcally determined. countries) into their original classes. One of these misclassiﬁcations is of the type C1 ! C2 _ C3 (an acceptable credit card application is classiﬁed into one of the two other groups). the third stage involves the discrimination among the countries of the lower-middle and the low-income economies groups. and the procedure proceeds with the solution of LP2. Doumpos / European Journal of Operational Research 139 (2002) 371–389 stage the countries belonging to the upper-middle income economies group are discriminated from the countries of the lower-middle and the low-income economies groups. All the other elements of the tables indicate misclassiﬁcations (classiﬁcation error).67%). China. the discrimination model developed through the proposed approach is not able to correctly classify all the alternatives (i. Concerning the credit risk assessment problem. its solution is computationally tractable.3%). after which no additional classiﬁcation errors are encountered. while Tables 2–4 present the obtained classiﬁcation results. as well as the corporate acquisition problem. year )1 of the basic sample is used for model development and the remaining years of the basic and the holdout sample are used for model validation. Thus. In credit cards assessment the solution of LP1 in the ﬁrst stage of the binary segmentation process results into four misclassiﬁcations (classiﬁcation accuracy 97.

92 – 100 – – – C2 (%) 1. rather than the result of poor ﬁnancial performance of the acquired ﬁrm (Belkaoui. This fact indicates that introducing qualitative data regarding the management of the ﬁrms. Indeed.67 Overall accuracy (%) 381 99. 1978.33 80 – 100 50 66. etc. could result in the development of a more appropriate model for predicting corporate acquisitions. but is mainly caused by the nature of the corporate acquisition problem itself. several authors on this ﬁeld have pointed out that corporate acquisitions are often part of a strategic plan for corporate development. Similar results (in terms of the eﬀectiveness of the proposed approach) are also obtained in business failure prediction. their organization.33 50 33.33 63. it should be noticed that the development of the discrimination model to predict corporate acquisitions was based only on ﬁnancial data (ﬁnancial ratios). which are not always the determinant factors of corporate acquisition. Slowinski et al.C. Doumpos / European Journal of Operational Research 139 (2002) 371–389 Table 2 Classiﬁcation results in credit cards assessment and country risk evaluation Original classiﬁcation Estimated classiﬁcation C1 (%) Credit cards C1 C2 C3 Country risk C1 C2 C3 C4 98. .67 C2 (%) 13.67 60 The extrapolating results obtained in the credit risk assessment problem are also encouraging.33 58.67 36.3 Table 3 Classiﬁcation results in credit risk assessment and corporate acquisitions Original classiﬁcation Estimated classiﬁcation Year )1 C1 (%) Credit risk C1 C2 Overall accuracy Corporate acquisitions C1 C2 Overall accuracy 100 – 100 100 – 100 C2 (%) – 100 Year )2 C1 (%) 96. Zopounidis.35 98.08 – – 100 – 2.. In that sense. M. the market trend.04 C3 (%) – – 100 – – 100 – C4 (%) – – – – – – 97.33 80 Year )3 C1 (%) 86.33% of the ﬁrms up to three years prior to the occurrence of ﬁnancial diﬃculties.67 20 83.33 40 61. Such information was unavailable in this case study. since the developed model is able to classify correctly 83. this is not necessarily due to the inability of the proposed approach to develop an appropriate discrimination model. However. 1997). their market share. In the corporate acquisition problem the classiﬁcation accuracy (overall accuracy) during the extrapolation of the developed model in the previous two years prior to acquisition is rather poor.33 C2 (%) 3.65 1. The lower performance of the method in the holdout sample is due to the fact that the data of this sample involve diﬀerent time period than the one considered in the basic sample.67 20 88..96 98.

00 57.00 100.3. In credit cards assessment and country risk evaluation. the proposed iterative binary segmentation procedure provides signiﬁcantly better classiﬁcation results than DA.84 42.50 30. In particular.75 83.75 71.00 82.3% for the iterative binary segmentation procedure versus 77. Tables 5–7 present the classiﬁcation results obtained through the application of DA and UTADIS.00 22. Furthermore.00 17. this section reports the results of the comparison with discriminant analysis (DA) and the UTADIS method (Zopounidis and Doumpos. in order to represent the decision maker’s preferential system.25 75.50 C2 (%) Overall accuracy 88. On the other hand.05 68.00 – 87.50 90.95 31. DA is commonly used by researchers to evaluate the performance of new discrimination algorithms and approaches.50 85. assuming that the variables are normally distributed and that the dispersion matrices among groups are equal (in the linear case). the UTADIS method leads to the development of an additive utility function that is used to evaluate the performance of the alternatives and decide upon their classiﬁcation.62% for DA). DA is a multivariate statistical technique that leads to the development of a linear discriminant function that maximises the ratio of among-group to within-group variability.50 10. Therefore. The selection of DA for compar- ison purposes in this case study was decided upon the popularity of the method in the ﬁeld of ﬁnance as an approach to study ﬁnancial decision problems.00 72. M.43 3.00 27. in the additive utility model developed through the UTADIS characterizes all the alternatives and not just the ones that belong in a speciﬁc class. and 21.67% for the iterative binary segmentation procedure versus 88. where the discrimination models developed are not extrapolated. 1999).16 68. Comparison with alternate classiﬁcation procedures In order to investigate the relative performance of the proposed preference disaggregation procedure as opposed to other classiﬁcation techniques.58 63.16 26.50 5.382 C.90 21.50 72.42 36.68% in the country risk evaluation problem (99.50 27.50 97.31 63. Furthermore. the consideration of the UTADIS method in this comparison enables the derivation of useful remarks with regard to the relative performance of these two similar MCDA approaches. In credit risk as- . The major diﬀerence between the UTADIS method and the proposed approach is that the former does not employ an iterative classiﬁcation procedure. the UTADIS method represents the MCDA approach to the classiﬁcation problem. The diﬀerence between the classiﬁcation accuracy of the two methods is 10% in the credit cards assessment problem (98. Zopounidis.69 36.43 65. as in the case of proposed iterative binary segmentation procedure.79 68.00 12.10 78.67% for DA).50 70. The method employs a similar modelling form to the one used in the proposed iterative binary segmentation procedure. Details on the model development process that is used in the UTADIS method can be found in Zopounidis and Doumpos (1999).84 73. These results are indicative of the superiority of the iterative binary segmentation procedure as opposed to DA in all the four considered case studies.00 77.50 15. Doumpos / European Journal of Operational Research 139 (2002) 371–389 Table 4 Classiﬁcation results in business failure prediction Original classiﬁcation Estimated classiﬁcation C1 (%) Basic sample Year )1 C1 C2 Year )2 C1 C2 Year )3 C1 C2 Year )4 C1 C2 Year )5 C1 C2 Holdout sample Year )1 C1 C2 Year )2 C1 C2 Year )3 C1 C2 95.

38 85.33 43.85 83.33 9.68 42.33 33.67 16.67 73. Doumpos / European Journal of Operational Research 139 (2002) 371–389 Table 5 DA and UTADIS results in credit cards assessment and country risk evaluation Original classiﬁcation Estimated classiﬁcation C1 (%) Discriminant analysis Credit cards C1 C2 C3 Country risk C1 C2 C3 C4 UTADIS Credit cards C1 C2 C3 Country risk C1 C2 C3 C4 C2 (%) C3 (%) C4 (%) 383 Overall accuracy (%) 90.11 88.76 – 8.33 58.71 98.67 91.33 16.67 56.24 – – – – – 2.04 1.33 26.00 66.52 7.95 12.67 .33 95 73.67 46.00 – 57.32 9.67 53.32 – – – 2.C.00 50. Zopounidis.67 42.92 – 90.00 58.67 70 26.52 4.33 – – – – 9.76 2.54 7.67 90 20 85 53.30 1.33 30 76.67 78.67 30 58.33 55 10 80 83.67 40.1 4.04 – – 100.67 77.67 2.86 83.08 – 9.69 – 90.67 66.33 13.00 – 100 87.33 16.46 16.33 70 6.33 43.85 16.00 79.67 – 38.02 Table 6 DA and UTADIS results in credit risk assessment and corporate acquisitions Original classiﬁcation Estimated classiﬁcation Year )1 C1 (%) Discriminant analysis Credit risk C1 C2 Overall accuracy Corporate acquisitions C1 C2 Overall accuracy UTADIS Credit risk C1 C2 Overall accuracy Corporate acquisitions C1 C2 Overall accuracy C2 (%) Year )2 C1 (%) C2 (%) Year )3 C1 (%) C2 (%) 93.35 3.00 33.33 50.33 83.00 90 6.67 56.62 97.33 10 93. M.33 60.33 3.14 81.70 98.33 70 100.14 80.67 46.67 96.63 88.33 16.33 83.67 85 – 100.

16 47. M. the proposed MCDA approach still provides higher classiﬁcation accuracy.11 26.00 70.00 17.16 31.50 12.05 47.00 15.00 100.79 52.50 80.00 85.00 45.75 77.50 75.00 0. the classiﬁcation models developed .50 67.00 82.00 67. Doumpos / European Journal of Operational Research 139 (2002) 371–389 Table 7 DA and UTADIS results in business failure prediction Original classiﬁcation Discriminant analysis Estimated classiﬁcation C1 (%) Basic sample Year )1 C1 C2 Year )2 C1 C2 Year )3 C1 C2 Year )4 C1 C2 Year )5 C1 C2 Holdout sample Year )1 C1 C2 Year )2 C1 C2 Year )3 C1 C2 C2 (%) Overall accuracy (%) UTADIS Estimated classiﬁcation C1 (%) C2 (%) Overall accuracy (%) 92.384 C.84 52.50 60.00 100.50 87. Nevertheless.16 26.50 20.68 36.84 73.50 87.89 73.00 75.37 78. Finally.00 55.50 85.00 7.00 30. especially in the case of the more complex problems involving the country risk assessment problem and the prediction of corporate acquisitions (year )1).00 12. the diﬀerences between the iterative binary segmentation procedure and DA are less signiﬁcant. while in year )3 for credit risk assessment the diﬀerence is increased to 6.50 32. the proposed MCDA approach provides signiﬁcantly higher classiﬁcation accuracy in the samples used for model development (reference sets).50 12.32 63.50 25.37 63.84 65.32 42.00 45. in business failure prediction the iterative binary segmentation procedure outperforms DA in all years both in the basic and the holdout sample.00 82.25 68.58 63.00 80.75 70.50 40.50 87.50 71. the proposed approach once again performs signiﬁcantly better on the data used for model development purposes (year )1).00 0. In years )2 and )3 where the developed discrimination models are extrapolated.00 80.66%.37 73. Zopounidis.50 12.00 20.95 52.33%.00 100.16 sessment and prediction of corporate acquisitions.00 87.50 83.32 36. Furthermore.68 57.00 20.90 55.26 63.00 81. as well as in years )2 and )3 for corporate acquisitions the diﬀerence between the classiﬁcation accuracy of the iterative binary segmentation procedure as opposed to DAs accuracy is 3.63 21. As opposed to the UTADIS method.42 36.68 63.00 55.00 17.16 57. In year )2 for credit risk assessment.00 90.25 83.90 57.63 47.63 26.50 15. especially in the corporate acquisitions problem (the classiﬁcation accuracy of the proposed approach is 100% versus 70% of DA).

4. and other discrimination techniques including neural networks. Additive utility functions and classiﬁcation rules B. in business failure prediction both the UTADIS method and the proposed iterative binary segmentation procedure provide similar results in the basic sample.1. logit and probit analysis. these theoretical advantages of the proposed approach should be explored in practice through appropriate applications and comparisons with alternative MCDA approaches. without being computationally intensive as several methods. However.g. it is often the case that. and mathematical programming formulations. The comparison with discriminant analysis using four real world case studies from the ﬁeld of ﬁnance. for instance. Zopounidis. demonstrated that the proposed approach could outperform a wellknown discrimination method. an evaluation criterion can be signiﬁcant in characterizing the alternatives belonging into class C1 . but the same criterion can be insigniﬁcant in characterizing the alternatives belonging into class C2 . Finally. However. Of course. The results obtained in years )2 and )3 in the credit risk assessment problem and the prediction of corporate acquisitions. the proposed approach is not the only MCDA classiﬁcation methodology that is based on utility-based aggregation model. The iterative binary segmentation procedure enables the modeling of such cases in order to represent more accurately the decision maker’s preferences and judgment. rough sets. Appendix B. Credit cards assessment Stage 1: . 1999) assume that there exists a global evaluation model in the form of an outranking relation or a utility function that describes the decision makers preferential system in evaluating all alternatives. most of the existing MCDA approaches (e. Doumpos / European Journal of Operational Research 139 (2002) 371–389 385 through the iterative binary segmentation procedure also provide high generalizing ability. Of course. See Table 8. Zopounidis and Doumpos. the UTADIS method. Appendix A. However. illustrate that the iterative binary segmentation procedure is able to provide at least comparable results with the ones provided by the alternate preference disaggregation approach. as well as the sequential consideration of three diﬀerent discrimination measures enables the method to achieve high discrimination accuracy. both in dichotomous as well as in multi-group discrimination problems. The iterative binary segmentation procedure that is employed. based on mixed-integer programming formulations are. but also to well-known parametric approaches such as discriminant.C.. Conclusions In this paper a new MCDA method has been proposed for discriminating among alternatives or objects belonging into diﬀerent predeﬁned homogeneous ordered classes (groups). through the development of a series of additive utility functions representing the value of the decisions concerning the classiﬁcation of the alternatives into a speciﬁc class or not. the results of the iterative binary segmentation procedure are superior to the ones of the UTADIS method in all three years of the holdout sample (additional details on the results of the UTADIS method in business failure prediction can be found in Zopounidis and Doumpos (1999)). The consideration of the proposed MCDA iterative binary segmentation procedure method extends the existing framework of the preference disaggregation approach. namely the UTADIS method. The ﬁve illustrative applications that were presented showed that the iterative binary segmentation procedure provides high discrimination and extrapolating accuracy. M. The application of the method in other real world discrimination decision problems as well as the conduct of simulation tests could provide more insight information regarding the performance of the method compared to other MCDA discrimination methods.

(g6 ) net trade in goods and services. (g11 ) GNP growth. (g7 ) net worth/(net worth + long term debt). (g2 ) business phone number. Country risk evaluation Stage 1: U ðaÞ ¼ 0:0093uC1 ðg1 Þ þ 0:0137uC1 ðg2 Þ 1 2 C1 þ 0:0095uC1 ðg3 Þ þ 0:02uC1 ðg4 Þ 3 4 þ 0:0127uC1 ðg5 Þ þ 0:0112uC1 ðg6 Þ 5 6 þ 0:8668uC1 ðg7 Þ þ 0:0099uC1 ðg8 Þ 7 8 þ 0:0103uC1 ðg9 Þ þ 0:0113uC1 ðg10 Þ 9 10 þ 0:0136uC1 ðg11 Þ þ 0:0117uC1 ðg12 Þ. (g2 ) cash ﬂow/total assets. (g5 ) applicant’s age. M. (g5 ) inﬂation (GDP deﬂator). (g10 ) inventories/working capital. (g3 ) gross domestic investment/GDP.2. (g5 ) (long term debt + current liabilities)/total assets. (g4 ) net income/net worth. (g2 ) net income/net worth. 7 U $C1 ðaÞ ¼ 0:3194u$C1 ðg1 Þ þ 0:0796u$C1 ðg2 Þ 1 2 þ 0:0009u$C1 ðg3 Þ þ 0:1196u$C1 ðg4 Þ 3 4 þ 0:0002u$C1 ðg5 Þ þ 0:1596u$C1 ðg6 Þ 5 6 þ 0:3207u$C1 ðg7 Þ: 7 Stage 2: U C2 ðaÞ ¼ 0:1176uC2 ðg1 Þ þ 0:0003uC2 ðg2 Þ 1 2 þ 0:4124uC2 ðg3 Þ þ 0:2344uC2 ðg4 Þ 3 4 þ 0:0002uC2 ðg5 Þ þ 0:2351uC2 ðg6 Þ. (g8 ) net worth/(net worth + long term debt). (g6 ) quick assets/current liabilities. (g4 ) cash/total assets. (g6 ) profession. 11 12 U $C1 ðaÞ ¼ 0:0894u$C1 ðg1 Þ þ 0:0137u$C1 ðg2 Þ 1 2 þ 0:0095u$C1 ðg3 Þ þ 0:0113u$C1 ðg4 Þ 3 4 . (g10 ) working capital/total assets (g1 ) Net income/gross proﬁt. (g9 ) net worth/net ﬁxed assets. 5 6 U $C2 ðaÞ ¼ 0:3525u$C2 ðg1 Þ þ 0:0003u$C2 ðg2 Þ 1 2 þ 0:41u$C2 ðg3 Þ þ 0:0017u$C2 ðg4 Þ 3 4 þ 0:2353u$C2 ðg5 Þ þ 0:0002u$C2 ðg6 Þ: 5 6 Classiﬁcation rule: If U C1 ðaÞ > U $C1 ðaÞ then a 2 Acceptable applications ðC1 Þ Else if U C2 ðaÞ > U $C2 ðaÞ then a2 Applications for further consideration ðC2 Þ Else a 2 Rejectable applications ðC3 Þ B. (g9 )dividends/cash ﬂow. (g7 ) (current assets À inventories)/current liabilities. Zopounidis. (g2 ) gross proﬁt/total assets. (g6 ) current assets/current liabilities. (g10 ) working capital/total assets. (g5 ) current assets/current liabilities. (g6 ) (long term debt + current liabilities)/cash ﬂow. (g11 ) interest expenses/sales. (g4 ) bank account for credit card payments. (g8 ) present value of debt/GNP. (g7 ) (long term debt + current liabilities)/total assets. (g8 ) quick assets/current liabilities. (g4 ) net worth/total liabilities. (g12 ) working capital/net worth Credit risk Corporate acquisitions Business failure prediction U C1 ðaÞ ¼ 0:0002uC1 ðg1 Þ þ 0:0798uC1 ðg2 Þ 1 2 þ 0:5599uC1 ðg3 Þ þ 0:2796uC1 ðg4 Þ 3 4 þ 0:0002uC1 ðg5 Þ þ 0:0802uC1 ðg6 Þ 5 6 þ 0:0001uC1 ðg7 Þ. (g9 ) current assets/current liabilities. (g8 ) cash/ current liabilities. (g5 ) total liabilities/total assets.386 C. (g12 ) gross international reserves in months of imports (g1 ) Earnings before interest and taxes/total assets. (g11 ) current liabilities/total assets. (g3 ) net income/total assets. (g9 ) total debt service/GNP. (g4 ) import volume growth. (g7 ) years in business (g1 ) Current account balance/GDP. Doumpos / European Journal of Operational Research 139 (2002) 371–389 Table 8 Evaluation criteria used in the ﬁve applications Application Credit cards Country risk Evaluation criteria (g1 ) Family status. (g10 ) income velocity of money (GDP/M2). (g7 ) present value of debt/exports of goods and services. (g2 ) export volume growth. (g3 ) net income/sales. (g3 ) net income/net worth. (g12 ) current liabilities/inventories (g1 ) Earnings before interest and taxes /total assets. (g3 ) residence.

9 10 þ 0:2635uC2 ðg3 Þ þ 0:0087uC2 ðg4 Þ 3 4 þ 0:0576uC2 ðg5 Þ þ 0:2099uC2 ðg6 Þ 5 6 þ 0:0167uC2 ðg7 Þ 7 þ 0:0098uC2 ðg8 Þ 8 þ 0:0102uC2 ðg9 Þ þ 0:1263uC2 ðg10 Þ 9 10 þ 0:0107uC2 ðg11 Þ þ 0:2195uC2 ðg12 Þ.C. Zopounidis.3. 11 12 U $C3 ðaÞ ¼ 0:2597u$C3 ðg1 Þ þ 0:0085u$C3 ðg2 Þ 1 2 þ 0:1386u$C3 ðg3 Þ þ 0:0068u$C3 ðg4 Þ 3 4 þ 0:008u$C3 ðg5 Þ þ 0:1949u$C3 ðg6 Þ 5 6 þ 0:0943u$C3 ðg7 Þ þ 0:0082u$C3 ðg8 Þ 7 8 þ 0:0085u$C3 ðg9 Þ þ 0:1222u$C3 ðg10 Þ 9 10 þ 0:1187u$C3 ðg11 Þ þ 0:0313u$C3 ðg12 Þ: 11 12 . 11 12 U $C2 ðaÞ ¼ 0:1086u$C2 ðg1 Þ þ 0:0251u$C2 ðg2 Þ 1 2 þ 0:0069u$C2 ðg3 Þ þ 0:1116u$C2 ðg4 Þ 3 4 þ 0:0261u$C2 ðg5 Þ þ 0:2502u$C2 ðg6 Þ 5 6 þ 0:0157u$C2 ðg7 Þ þ 0:0641u$C2 ðg8 Þ 7 8 þ 0:0102u$C2 ðg9 Þ þ 0:2128u$C2 ðg10 Þ 9 10 þ 0:1171u$C2 ðg11 Þ þ 0:0516u$C2 ðg12 Þ: 11 12 Stage 3: U C3 ðaÞ ¼ 0:0052uC3 ðg1 Þ þ 0:1806uC3 ðg2 Þ 1 2 þ þ 0:3212uC3 ðg3 Þ 3 0:008uC3 ðg5 Þ 5 þ 0:0068uC3 ðg4 Þ 4 þ 0:1627uC3 ðg6 Þ 6 þ 0:1183uC3 ðg7 Þ þ 0:0082uC3 ðg8 Þ 7 8 þ 0:0085uC3 ðg9 Þ þ 0:0757uC3 ðg10 Þ 9 10 þ 0:0086uC3 ðg11 Þ þ 0:0963uC3 ðg12 Þ. Credit risk assessment Stage 1: U C1 ðaÞ ¼ 0:0059uC1 ðg1 Þ þ 0:0037uC1 ðg2 Þ 1 2 þ 0:9417uC1 ðg3 Þ þ 0:0059uC1 ðg4 Þ 3 4 þ 0:0059uC1 ðg5 Þ þ 0:0058uC1 ðg6 Þ 5 6 þ 0:0056uC1 ðg7 Þ þ 0:0049uC1 ðg8 Þ 7 8 þ 0:0029uC1 ðg9 Þ þ 0:0059uC1 ðg10 Þ 9 10 þ 0:0059uC1 ðg11 Þ þ 0:0059uC1 ðg12 Þ. Doumpos / European Journal of Operational Research 139 (2002) 371–389 387 þ 0:0592u$C1 ðg5 Þ þ 0:0112u$C1 ðg6 Þ 5 6 þ 0:7489u$C1 ðg7 Þ þ 0:0099u$C1 ðg8 Þ 7 8 þ 0:0103u$C1 ðg9 Þ þ 0:0113u$C1 ðg10 Þ 9 10 þ 0:0136u$C1 ðg11 Þ þ 0:0117u$C1 ðg12 Þ: 11 12 Stage 2: U ðaÞ ¼ 0:0068uC2 ðg1 Þ þ 0:0602uC2 ðg2 Þ 1 2 C2 Classiﬁcation rule: If U C1 ðaÞ > U $C1 ðaÞ then a 2 High-income economies ðC1 Þ Else if U C2 ðaÞ > U $C2 ðaÞ then a 2 Uppermiddle income economies ðC2 Þ Else if U C3 ðaÞ > U $C3 ðaÞ then a 2 Lowermiddle income economies ðC3 Þ Else a 2 Low-income economies ðC4 Þ B. Corporate acquisitions Stage 1: U C1 ðaÞ ¼ 0:0569uC1 ðg1 Þ þ 0:8104uC1 ðg2 Þ 1 2 þ 0:0059uC1 ðg3 Þ þ 0:0183uC1 ðg4 Þ 3 4 þ 0:0396uC1 ðg5 Þ þ 0:0059uC1 ðg6 Þ 5 6 þ 0:0043uC1 ðg7 Þ þ 0:0496uC1 ðg8 Þ 7 8 þ 0:0059uC1 ðg9 Þ þ 0:0059uC1 ðg10 Þ. 11 12 U $C1 ðaÞ ¼ 0:9205u$C1 ðg1 Þ þ 0:0119u$C1 ðg2 Þ 1 2 þ 0:0189u$C1 ðg3 Þ þ 0:0059u$C1 ðg4 Þ 3 4 þ 0:0059u$C1 ðg5 Þ þ 0:0058u$C1 ðg6 Þ 5 6 þ 0:0056u$C1 ðg7 Þ þ 0:0049u$C1 ðg8 Þ 7 8 þ0:0029u$C1 ðg9 Þ þ 0:0059u$C1 ðg10 Þ 9 10 þ0:0059u$C1 ðg11 Þ þ 0:0059u$C1 ðg12 Þ: 11 12 Classiﬁcation rule: If U C1 ðaÞ > U $C1 ðaÞ then a 2 High risk firms ðC1 Þ Else a 2 Low risk firms ðC2 Þ B.4. M.

5400 )1.0093 1. Jacquet-Lagrze.4721 )1. 1980. A. R.388 C. 1999. R.0666 0.. e European Working Group on Multicriteria Decision Aid.0794 )0.. See Table 9.3111 Credit risk 9.0740 )0.I.0588 0. References Classiﬁcation rule: If U C1 ðaÞ > U $C1 ðaÞ then a 2 Non-failed firms ðC1 Þ Else a 2 Acquired firms ðC2 Þ B. 3.0074 0. Eisenbeis.5488 )1. Zopounidis.0960 1.0000 )0. Journal of Business Finance and Accounting 5.0152 0..2744 U $C1 ðaÞ ¼ 0:0057u$C1 ðg1 Þ þ 0:0576u$C1 ðg2 Þ 1 2 þ 0:0059u$C1 ðg3 Þ þ 0:0041u$C1 ðg4 Þ 3 4 þ 0:0052u$C1 ðg5 Þ þ 0:0059u$C1 ðg6 Þ 5 6 þ þ 0:8979u$C1 ðg7 Þ 7 0:0059u$C1 ðg9 Þ 9 þ 0:0059u$C1 ðg8 Þ 8 þ 0:0059u$C1 ðg10 Þ: 10 þ 0:0085u$C1 ðg9 Þ þ 0:0079u$C1 ðg10 Þ 9 10 þ 0:0079u$C1 ðg11 Þ þ 0:0073u$C1 ðg12 Þ: 11 12 Classiﬁcation rule: If U C1 ðaÞ > U $C1 ðaÞ then a 2 Non-failed firms ðC1 Þ Else a 2 Failed firms ðC2 Þ Appendix C.4196 0.4615 )0..6599 )0.0653 2.7266 )0.0031 0.9008 )0.9725 0.0044 )0. 263–280.5665 )2.0259 0.. banking and ﬁnance.1245 1. Belkaoui. Dimitras.0143 0.. C.0176 0.1413 0.5.0342 )0. 11 12 U $C1 ðaÞ ¼ 0:0079u$C1 ðg1 Þ þ 0:0079u$C1 ðg2 Þ 1 2 þ 0:0385u$C1 ðg3 Þ þ 0:0068u$C1 ðg4 Þ 3 4 þ 0:0079u$C1 ðg5 Þ þ 0:0079u$C1 ðg6 Þ 5 6 þ 0:8865u$C1 ðg7 Þ þ 0:0050u$C1 ðg8 Þ 7 8 Altman. G.2882 )0.1088 0.0199 0.0644 )0.5389 )0.7318 )0.0486 0.7149 0. Doumpos / European Journal of Operational Research 139 (2002) 371–389 Table 9 Discriminant functions developed in the ﬁve applications Evaluation criteria g1 g2 g3 g4 g5 g6 g7 g8 g9 g10 g11 g12 Constant Credit cards 0.6294 0.0061 0. Business failure prediction using rough sets. Zopounidis.9044 3. J.0890 0.5524 )1.0004 0.0279 )1.0591 )0. 93–107. Application of classiﬁcation techniques in business.0009 )0.0010 )0.0276 )0.0086 )0.0666 0. Financial ratios as predictors of Canadian takeovers.0007 0.4376 )1. 1981. E.0168 0..6369 )0. Avery.0566 )2. 39–57.0262 0. A. Devaud. R. Slowinski.0000 )0. Susmaga. European Journal of Operational Research 114.4736 0. 1998. JAI Press. R.2847 7.0750 )0. In: Contemporary Studies in Economic and Financial Analysis.7925 )2..0113 )0. Groussaud.0089 0. Doumpos. 1978.3304 )2.0000 0.0087 )0..0007 0..0124 0. Greenwich.0178 0.3474 )0. M.I. CT.0345 0. Bochum.0093 0.. J. Business failure prediction Stage 1 U C1 ðaÞ ¼ 0:0523uC1 ðg1 Þ þ 0:0079uC1 ðg2 Þ 1 2 þ 0:8531uC1 ðg3 Þ þ 0:0068uC1 ðg4 Þ 3 4 þ 0:0079uC1 ðg5 Þ þ 0:0079uC1 ðg6 Þ 5 6 þ 0:0281uC1 ðg7 Þ þ 0:0050uC1 ðg8 Þ 7 8 þ 0:0079uC1 ðg9 Þ þ 0:0079uC1 ðg10 Þ 9 10 þ 0:0079uC1 ðg11 Þ þ 0:0073uC1 ðg12 Þ.3884 Corporate acquisitions 3.M..0134 0. e UTADIS: Une mthode de construction de fonctions e d’utilit additives rendant compte de jugements globaux.2040 )2.9154 2. The use of the preference disaggregation analysis in the assessment of ﬁnancial risks. . M. Sinkey.1727 )0.9109 1.9057 )0.1510 )7.0109 0.8510 )0.0020 0.. C.5716 1.2257 Country risk )0.0022 )1. Fuzzy Economic Review 3 (1).9765 )0.0082 )0.0014 0.8982 Business failure 0. E.. vol.5321 0. Zopounidis.

277–304. F. Rough set approach to multiattribute decision analysis.. Multicriteria decision aid in credit cards assessment. Zopounidis. 1981b. Kluwer Academic Publishers.. 1997. Th.. 1995.. An application of the UTA e discriminant model for the evaluation of R&D projects. Dordrecht. A.. 74. R. Kluwer Academic Publishers. A multicriteria analysis for trichotomic segmentation problems. 1982. 203–211.M. R. M. 136. Nontraditional approaches to statistical classiﬁcation: Some perspectives on Lp -norm methods. European Journal of Operational Research 72. J. pp. Technical University of Crete. P. ELECCALC – An interactive software for modelling the decision maker’s preferences. Decision Sciences 12. Doumpos / European Journal of Operational Research 139 (2002) 371–389 Freed.. Document du Lamsade.. B. 443–459. C. 1995. Operational Methods. F. 1997. Doumpos. 341–356. A. C. (Eds.. Moscarola. A multicriteria decision aid methodology for sorting decision problems: The case of ﬁnancial distress. Pardalos. Z. J. L. M..M. e Zopounidis.. Advances in Multicriteria Analysis.. C. 1977.. Prediction of company acquisition in Greece by means of the rough set approach.. Stam... Zopounidis. Decision Support Systems 12. Optimization Methods and Software 8. Greece (in Greek)... Z. ELECTRE TRI: Aspects methodologiques et manuel d’utilisation.. C. M. Master’s Thesis. 1–15. N. P. Jacquet-Lagrze.). Zopounidis. N. P.N.. (Eds. Managing in Uncertainty: Theory and Practice. Developing a multicriteria decision support system for ﬁnancial classiﬁcation problems: The FINCLAS system. European Journal of Operational Research 7. C. Zopounidis. W. P.. London. Slowinski.C. e Slowinski. K. Zopounidis. Yu. Siskos. Pawlak. Kiss.. Universit de Paris. RAIRO Recherche e e Oprationnele 11 (2). Glover.. Freed.M. Siskos. 44–60.. Pardalos. Kluwer Academic Publishers.. C.I. Nadeau. In: Pardalos. 68–74. 389 Roy. International Journal of Information and Computer Sciences 11. Roy. Dimitras.. In: Nijkamp. 1981a. pp.M. Methodological framework for the analysis and assessment of counties’ creditworthiness. Doumpos... Martel. 1998. Pardalos. (Eds.). Procdure automatique d’exae mem de dossiers fonde sur une segmentation trichotomique e en prsence de critres multiples. B. 1998... Glover.M. Mavridou. 197– 218. Dordrecht. Dauphine. no.. 1999. 1994.. Advances in Multicriteria Analysis. European Journal of Operational Research 100. 245–257. R. P. . Y. Computational Economics 14 (3). C. E. pp. 163–178. Y. 311–326.. 1994.). Doumpos.. A linear programming approach to the discriminant problem. In: Zopounidis. 1981.. M.. Gower Press. Annals of Operations Research 74. Rough sets. Pawlak. Spronk. Pentaraki. Zopounidis. Dordrecht. J. Simple but powerful goal programming models for discriminant problems. 1998. 1992. 145–173.

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