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Bankrupt Prediction

BY
Medha DK 1CR22EC140
Meghana PS 1CR22EC141
Lakshmi 1CR22EC133

Under the Guidance of Prof.Krishna Teja

ELECTRONICS AND COMMUNICATION

Date
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CONTENTS

►Introduction
►Methodology
►Implementation
►Result & Conclusion
►Future Scope
►References
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INTRODUCTION

► Bankruptcy detection is a major topic in finance. Indeed, for obvious reasons, many actors such as
shareholders, managers or banks are interested in the likelihood of bankruptcy of firms.
Consequently, many studies have been carried out on the topic of bankruptcy prediction. In the late
1960s, Beaver (1966) introduced a univariate analysis, providing the first statistical justification for
the ability of financial ratios to account for default. Then, Altman (1968) developed the Z-score
model by using five financial ratios to predict the bankruptcy of U.S. firms. In his paper, Altman
employed multiple discriminant analysis (MDA) techniques to determine the probability of
bankruptcy on a sample of firms.Altman’s Z-Score model has been a popular technique and widely
used by auditors, accountants, courts, banks, and other creditors. The MDA technique assumes that
variables follow a normal distribution, and this methodology was later adopted by many other
researchers

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METHODOLOGY

This section introduces the research methodology of this study, including research procedure, data and
research variables, data pre-processing, machine learning models, and confusion matrix. The details are
introduced in the following.
Empirical analyses
This section presents the bankruptcy prediction results employing the above mentioned four machine
learning models under different conditions, and further analyzes and discusses whether annual report
T_CV variables enhance the effectiveness of bankruptcy prediction under the model based on Barboza
et al. (2017). In addition to the model accuracy rate, this study specifically focuses on F1-score, Type I
error, and Type II error.

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IMPLEMENTATION

► Predicting bankruptcy is a complex task that involves analyzing financial data and
identifying patterns that may indicate financial distress. There are various
approaches and techniques you can use for bankruptcy prediction, and the
implementation may vary depending on the specific data available and the chosen
model. Here is a general guide on how you might approach implementing a
bankruptcy prediction system:
► Steps for Implementing Bankruptcy Prediction:
1. Data Collection:
1. Gather financial data from relevant sources. This may include balance sheets,
income statements, cash flow statements, and other financial ratios.
1. Data Preprocessing:
1. Clean the data by handling missing values and outliers.
2. Normalize or standardize numerical features to bring them to a similar scale.
3. Encode categorical variables if needed.
2. Feature Selection:
1. Identify relevant features that may contribute to bankruptcy prediction.
2. Use techniques such as correlation analysis, feature importance, or
dimensionality reduction methods.
3. Model Selection:
1. Choose a suitable machine learning algorithm for bankruptcy prediction.
Common models include logistic regression, decision trees, random forests,
support vector machines, or neural networks.
1. Model Evaluation:
1. Evaluate the model's performance on the testing set using appropriate metrics (accuracy,
precision, recall, F1 score, ROC-AUC, etc.).
2. Consider using cross-validation to obtain a more robust evaluation.
2. Hyperparameter Tuning:
1. Fine-tune the model's hyperparameters to improve performance.
3. Deployment:
1. Deploy the trained model in a production environment. This could involve integrating the
model into a web application, API, or any other system.
4. Monitoring and Maintenance:
1. Implement a system for monitoring the model's performance over time.
2. Regularly update the model with new data to ensure it remains accurate.
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CONCLUSION

The use of ML techniques in bankruptcy prediction research was thoroughly

surveyed in this meta-analysis. Sixty-four studies were reviewed and data were extracted
on a number of six variables. With regard to data balance, variables’ category, variables’
type, industry, and region, this meta-analysis sought to explain the prediction accuracy of
several machine learning algorithms. This study adds to the body of literature in several
ways. First, our results demonstrate that there is a statistically significant difference in
accuracy performance between machine learning models in the studies on the subject of
bankruptcy prediction. These differences are mainly driven by the algorithm model,
industry and region of data. Second, we were able to pinpoint some of the key factors that
influence machine learning prediction accuracy by examining studies in relation to some
variables that, to the best of our knowledge, have never been considered before in BPMs
(data type, data category, industry, and region). Third, as far as it came to our attention,
there are no studies that examine the factors that affect the accuracy of bankruptcy
prediction models. Name of the Department
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FUTURE WORK

Risk Management in Banking and Finance

Supply Chain Risk Management
Early Warning Systems
Government Financial Monitoring

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