Is it possible to build a stable ex-ante bankruptcy prediction model for Visegrad Group companies? A multi-year approach

What the paper says

Corporate bankruptcies pose significant challenges, impacting a wide range of stakeholders. While valuable, existing research on bankruptcy prediction primarily focuses on ex-post analysis, identifying financial indicators associated with past failures. This approach offers limited utility in proactively mitigating the negative consequences of future corporate distress. This study addresses this critical gap by developing ex-ante bankruptcy prediction models for the Visegrad Group countries. Employing Multiple Discriminant Analysis, these models are aimed at identifying companies at risk of bankruptcy up to five years before the event. A multi-model approach is utilized to construct a comprehensive V4 model that encompasses all four nations and develop individual models for each member country. Data from a sample of 25,084 companies incorporates 15 key financial ratios and 5 non-financial variables. The ratios differ significantly between bankrupt and solvent companies, and each model is calibrated with a single cut-off that caps the in-sample Type II error at 10%. Ex-ante evaluation, however, shows that this restriction does not halt the erosion of correct identification of failed firms. Rather, it drops from 90% in the test year to about one-third at a five-year horizon, even though classification of healthy firms remains above 95% and overall accuracy stays above 92%. The V4 model performed well, indicating that companies across the region share similar financial characteristics. Notably, two financial ratios, Net Income to Total Liabilities / Total Assets (X06) and Net Income / Total Assets (X04), consistently proved to be reliable indicators of financial health in all the examined models. These ratios are important because they help identify companies with strong financial stability across the V4 countries.