Business Failure Prediction: Simple-Intuitive Models versus Statistical Models

The IUP Journal of Business Strategy, Vol. VI, Nos. 3 & 4, pp. 7-44, September & December 2009

Posted: 7 Jan 2010

See all articles by Hubert Ooghe

Hubert Ooghe

Vlerick Business School; Ghent University - Department of Accountancy and Corporate Finance

Christophe Spaenjers

Tilburg University

Pieter Vandermoere

Vlerick Leuven Gent Management School

Date Written: January 6, 2010

Abstract

This paper gives an overview of the shortcomings of the most frequently used statistical techniques in failure prediction modeling. The statistical procedures that underpin the selection of variables and the determination of coefficients often lead to ‘overfitting’. It is also seen that the ‘expected signs’ of variables are sometimes neglected and that an underlying theoretical framework mostly does not exist. Based on the current knowledge of failing firms, this paper constructs a new type of failure prediction model, namely ‘Simple-Intuitive Models’ (SIM). In these models, eight variables are first logit-transformed and then equally weighted. These models are tested on two broad validation samples [one year prior to failure (ypf) and three ypf] of Belgian companies. The performance results of the best simple-intuitive model is comparable to those of less transparent and more complex statistical models.

Suggested Citation

Ooghe, Hubert and Spaenjers, Christophe and Vandermoere, Pieter, Business Failure Prediction: Simple-Intuitive Models versus Statistical Models (January 6, 2010). The IUP Journal of Business Strategy, Vol. VI, Nos. 3 & 4, pp. 7-44, September & December 2009, Available at SSRN: https://ssrn.com/abstract=1532045

Hubert Ooghe (Contact Author)

Vlerick Business School ( email )

Reep 1
B-9000 Gent
Belgium

Ghent University - Department of Accountancy and Corporate Finance

Kuiperskaai 55 E
B-9000 Ghent
Belgium

Christophe Spaenjers

Tilburg University ( email )

Tilburg, 5000 LE
Netherlands

Pieter Vandermoere

Vlerick Leuven Gent Management School ( email )

Library
REEP 1
Gent, BE-9000
Belgium

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