Probabilistic Neural Networks in Bankruptcy Prediction

Abstract Prior application of neural networks in finance and accounting, notably in bankruptcy prediction, are limited to back-propagation neural networks. Their well-known disadvantages, however, limit the practical usefulness of neural discriminant models. Instead, a probabilistic neural network with fewer of these difficulties is proposed. Using data from the U.S. oil and gas industry, alternate methodologies are compared. Whereas probabilistic neural networks without pattern normalization and Fisher discriminant analysis achieve the best overall estimation results, discriminant analysis produces superior results for bankrupt companies.

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