Prague Economic Papers 2018, 27(6):637-653 | DOI: 10.18267/j.pep.664

What Do Post-Communist Countries Have in Common When Predicting Financial Distress?

Madalina Ecaterina Popescu1, Victor Dragotã2
1 Bucharest University of Economic Studies, Faculty of Economic Cybernetics, Statistics and Informatics, and INCSMPS (madalina.andreica@csie.ase.ro)
2 Bucharest University of Economic Studies, Faculty of Finance, Insurance, Banking and Stock Exchange, and CEFIMO (victor.dragota@fin.ase.ro)

Business failure prediction is an important issue in corporate finance. Different prediction models are proposed by financial theory and are often used in practice. Their application is effortless, selecting only few key inputs with the greatest informative power from the large list of possible indicators. Our paper identifies the financial distress predictors for 5 post-communist countries (Bulgaria, Croatia, the Czech Republic, Hungary and Romania) based on information collected from the Amadeus database for the period 2011-2013 using CHAID decision trees and neural networks. We propose a short list of indicators, which can offer a synthetic perspective on corporate distress risk, adapted for these countries. The best prediction models are substantially different from country to country: in the Czech Republic, Hungary and Romania the flow-approach indicators perform better, while in Bulgaria and Croatia - the stock-approach indicators. The results suggest that the extrapolation of such models from one country to another should be made cautiously. One interesting finding is the presence of the ratios per employee as predictors of financial distress.

Keywords: financial distress, predictors, prediction models, post-communist countries, CHAID decision trees, neural networks
JEL classification: C53, G33, L25

Received: April 4, 2017; Accepted: December 8, 2017; Prepublished online: April 12, 2018; Published: December 1, 2018  Show citation

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Popescu, M.E., & Dragotã, V. (2018). What Do Post-Communist Countries Have in Common When Predicting Financial Distress? Prague Economic Papers, 27(6), 637-653. doi: 10.18267/j.pep.664
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