Financial distress early warning based on group decision making

  • Authors:
  • Jie Sun;Hui Li

  • Affiliations:
  • School of Business Administration, Zhejiang Normal University, Jinhua 321004, Zhejiang Province, PR China;School of Business Administration, Zhejiang Normal University, Jinhua 321004, Zhejiang Province, PR China

  • Venue:
  • Computers and Operations Research
  • Year:
  • 2009

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Abstract

Financial distress early warning is important for business bankruptcy prevention, and various quantitative prediction methods based on financial ratios have been proposed. However, little attention has been paid to the important role of experts' experiential knowledge and non-financial information. From this point of view, the article puts forward a group decision-making approach based on experts' knowledge and all kinds of financial or non-financial information to diagnose business financial distress. Based on the risk factors of enterprise financial distress, a qualitative attribute set and its scoring criteria are designed. A method integrating linguistic label and interval value is adopted for decision makers to express their preference on attributes, and a multi-expert negotiation mechanism is designed for weighting attributes. Diagnosis on business financial distress is made through the grey evaluation method, which also tries to find out the potential risks that may cause financial distress. Case study of a real world company is carried out to validate the proposed financial distress early warning method based on group decision making.