Abstract

Issue of enterprise financial distress represents the actual and interdisciplinary topic for the economic community. The bankrupt is thus one of the major externalities of today’s modern economies, which cannot be avoided even with every effort. Where there are investment opportunities, there are individuals and businesses that are willing to assume their financial obligations and the resulting risks to maintain and develop their standard of living or their economic activities. The decision tree algorithm is one of the most intuitive methods of data mining which can be used for financial distress prediction. Systematization literary sources and approaches prove that decision trees represent the part of the innovations in financial management. The main propose of the research is a possibility of application of a decision tree algorithm for the creation of the prediction model, which can be used in economy practice. Paper main aim is to create a comprehensive prediction model of enterprise financial distress based on decision trees, under the conditions of emerging markets. Paper methods are based on the decision tree, with emphasis on algorithm CART. Emerging markets included 17 countries: Slovak Republic, Czech Republic, Poland, Hungary, Romania, Bulgaria, Lithuania, Latvia, Estonia, Slovenia, Croatia, Serbia, Russia, Ukraine, Belarus, Montenegro and Macedonia. Paper research is focused on the possibilities of implementation of decision tree algorithm for creation of prediction model in the condition of emerging markets. Used data contained 2,359,731 enterprises from emerging markets (30% of total amount); divided into prosperous enterprises (1,802,027) and non-prosperous enterprises (557,704); obtained from Amadeus database. Input variables for model represented 24 financial indicators, 3 dummy variables and countries GDP data, in the years 2015 and 2016. The 80% of enterprises represented training sample and 20% test sample, for model creation. The model correctly classified 93.2% of enterprises from both the training and test sample. Correctly classification of non-prosperous enterprises was 83.5% in both samples. The result of the research brings the new model for identification of bankrupt of enterprises. The created prediction model can be considered sufficiently suitable for classifying enterprises in emerging markets.

Keywords: prediction model, decision tree, emerging markets.

JEL Classification: C5, G33.

Cite as: Podhorska, I., Vrbka, J., Lazaroiu, G., & Kovacova, M. (2020). Innovations in financial management: recursive prediction model based on decision trees. Marketing and Management of Innovations, 3, 276-292. https://doi.org/10.21272/mmi.2020.3-20

This work is licensed under a Creative Commons Attribution 4.0 International License

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