An evolution-based approach with modularized evaluations to forecast financial distress

  • Authors:
  • Po-Chang Ko;Ping-Chen Lin

  • Affiliations:
  • Department of Information Management, National Kaohsiung University of Applied Sciences, Kaohsiung 807, Taiwan, ROC;Department of Information Management, Van Nung Institute of Technology, Jungli 320, Taiwan, ROC

  • Venue:
  • Knowledge-Based Systems
  • Year:
  • 2006

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Abstract

Due to the radical changing of the global economy, a more precise forecasting of corporate financial distress helps provide important judgment principles to decision-makers. Although financial statements reflect a firm's business activities, it is very challenging to discover critical information from these statements. Applying machine learning algorithms can be demonstrated to improve forecasting accuracy in predicting corporate bankruptcy. In this paper, we introduce an evolutionary approach with modularized evaluation functions to forecast financial distress, which allows using any evolutionary algorithm to extract the set of critical financial ratios and integrates more evaluation function modules to achieve a better forecasting accuracy by assigning distinct weights. To achieve a more precise predicting accuracy, the undesirable forecasting results from some modules are weeded out, if their predicting accuracies are out of the allowable tolerance range as learned from our mechanism.