GM(1, 1) in bankruptcy forecasting

Abstract

Purpose

The present paper tries to give a new vision on the firm's future evolution forecasting. By taking into account some of the current values of its symptoms and applying one of the most used models in the grey systems theory, namely the GM(1,1), the predictions related to its future symptoms' values can be determined. Having these projected values and the grey economic-financial matrix, K, the future diseases that can hit a company can be depicted along with their causes. The paper aims to discuss these issues.

Design/methodology/approach

Forecasting the future development of a firm is always an important issue in firm's survival in nowadays economy. Most of all, it is extremely important to be aware all the time about the inner and outer factors than can make a difference between a successful and a bankrupt firm. For this, here the authors have used three GM(1,1) models for forecasting the future symptoms (expressed through financial indicators) and performance indicator of a firm. Each time, based on the determined accuracy rate, a specific GM model has been chosen for every indicator's forecasting.

Findings

Considering some previous researches and findings in bankruptcy modelling and diagnosis, this paper enlarges their applicability by adding the possibility to make future predictions on the indicators' evolution and to observe and to better manage their causes. As it was expected, the GM(1,1) models used for the forecasting of the various time series variables taken into account were different from one case to another, choosing the best-specific model for each variable case conducted to more accurate data-fit, with direct results in the causes hierarchy.

Practical implications

By knowing the main causes that determine a certain state in firms' development and understanding them, the manager can action upon them in a manner that can make the difference between a bankrupt and a real successful firm.

Originality/value

The paper succeeds in enlarging the view regarding bankruptcy forecasting by adding a dynamic view over the considered variables. If, in most of the cases when facing with financial forecasting, a single model is used for predictions, here the best GM model has been chosen for each variable based on the obtained accuracy rate. The results are concluding.

Citation

Delcea, C., Bradea, I., Maracine, V., Scarlat, E. and Cotfas, L.-A. (2013), "GM(1, 1) in bankruptcy forecasting", Grey Systems: Theory and Application, Vol. 3 No. 3, pp. 250-265. https://doi.org/10.1108/GS-08-2013-0014