The implication of machine learning for financial solvency prediction: an empirical analysis on public listed companies of Bangladesh

• Published in: Journal of Asian Business and Economic Studies 2021-11, Vol.28 (4), p.303-320
• Main Author: Abdullah, Mohammad
• Format: Article
• Language: English
• Subjects: Algorithms; Annual reports; Artificial intelligence; artificial neural network; Bankruptcy; bankruptcy prediction; Bibliometrics; Big Data; Bond ratings; Classification; Corporate profits; Data analysis; Data mining; Datasets; Decision making; Discriminant analysis; ensemble classifier; financial distress; g17; g30; g33; Insolvency; Investments; Machine learning; Solvency; Solvents; Standard scores
• ISSN: 2515-964X; 2515-964X
• DOI: 10.1108/JABES-11-2020-0128

PurposeFinancial health of a corporation is a great concern for every investor level and decision-makers. For many years, financial solvency prediction is a significant issue throughout academia, precisely in finance. This requirement leads this study to check whether machine learning can be implemented in financial solvency prediction.Design/methodology/approachThis study analyzed 244 Dhaka stock exchange public-listed companies over the 2015–2019 period, and two subsets of data are also developed as training and testing datasets. For machine learning model building, samples are classified as secure, healthy and insolvent by the Altman Z-score. R statistical software is used to make predictive models of five classifiers and all model performances are measured with different performance metrics such as logarithmic loss (logLoss), area under the curve (AUC), precision recall AUC (prAUC), accuracy, kappa, sensitivity and specificity.FindingsThis study found that the artificial neural network classifier has 88% accuracy and sensitivity rate; also, AUC for this model is 96%. However, the ensemble classifier outperforms all other models by considering logLoss and other metrics.Research limitations/implicationsThe major result of this study can be implicated to the financial institution for credit scoring, credit rating and loan classification, etc. And other companies can implement machine learning models to their enterprise resource planning software to trace their financial solvency.Practical implicationsFinally, a predictive application is developed through training a model with 1,200 observations and making it available for all rational and novice investors (Abdullah, 2020).Originality/valueThis study found that, with the best of author expertise, the author did not find any studies regarding machine learning research of financial solvency that examines a comparable number of a dataset, with all these models in Bangladesh.