International Journal of Allied Practice, Research and Review A Comparison of Artificial Neural Network and Multiple Discriminant Analysis Models for Bankruptcy Prediction in India

Abstract -Many researchers have built bankruptcy prediction models and tested in different countries. Among them the most popular have been the model developed by Edward Altman in 1968 in which Multiple Discriminant Analysis was used. In this study we had compared the most popular technique used for bankruptcy prediction that is Multiple Discriminant Analysis with a comparatively newer one that is Artificial Neural Network with Indian data. To the best of our knowledge this study is the first of its kind in which comparison of both the techniques with Indian Data for bankruptcy prediction have been shown. For building models for bankruptcy prediction, pairs of bankrupt and non-bankrupt companies were needed. The names of bankrupt companies were taken from the official web site of BIFR (Board of Industrial and Financial Reconstruction).A ten year period was studied in this study. The financial data was acquired from Capitaline data source. The prospective pair of a bankrupt company should be i) belonging to manufacturing industry ii) listed in any of the stock exchange so that Market Capitalisation can be computed iii) belonging to the same or nearly same industry classification (of bankrupt company), iv) of almost same size with a plus minus variation of 30% v) free from bankruptcy filing vi) financially healthy and vii) having financial data of last five years prior to bankruptcy. As a result of the above mentioned criterion we could match or pair only 109 bankrupt companies with non-bankrupt companies. Thus the sample size became of 218 cases. Six data sets were prepared pertaining to year of bankruptcy, t0 through fifth year prior to bankruptcy, t5. We had found that ANN had not only showed better classification results as compare to MDA's results, it had shown successful bankruptcy prediction till four years prior to bankruptcy whereas MDA could show successful bankruptcy prediction till only two years prior to bankruptcy. Hence, we recommend that ANN should be used for Indian Companies for assessing their financial health