Corporate failure prediction models in the twenty-first century: a review

Abstract

Purpose Corporate failure remains a critical financial concern, with implications for both firms and financial institutions; this paper aims to review the literature that proposes corporate failure prediction models for the twenty-first century. Design/methodology/approach This paper gathers information from 106 published articles that contain corporate failure prediction models. The focus of the analysis is on the elements needed to design corporate failure prediction models (definition of failure, sample approach, prediction methods, variables and evaluation metrics and performance). The in-depth review creates a synthesis of current trends, from the view of those elements. Findings Both consensus and divergences emerge regarding the design of corporate failure prediction models. On the one hand, authors agree about the use of bankruptcy as a definition of failure and that at least two evaluation metrics are needed to examine model performance for each class, individually and in general. On the other hand, they disagree about data collection procedures. Although several explanatory variables have been considered, all of them serve as complements for the primarily used financial information. Finally, the selection of prediction methods depends entirely on the research objective. These discrepancies suggest fundamental advances in discovery and establish valuable ideas for further research. Originality/value This paper reveals some caveats and provides extensive, comprehensible guidelines for corporate failure prediction, which researchers can leverage as they continue to investigate this critical financial subject. It also suggests fruitful directions to develop further experiments.