How Financial Ratios and Corporate Governance Mechanism Can Be the Predictors of Bankruptcy Using Supervised AI Techniques

Abstract

The discussion on replacing traditional statistical techniques with artificial intelligence techniques is inn nowadays. Several studies in the past have proved artificial intelligence techniques to be better models for prediction than traditional techniques. Financial crisis are imminent in the world due to prevailing covid-19 situation in world. Past incidents of financial crisis have point out major flaws in predicting bankruptcy and credit risk of companies. So, in our study, we have used 29 financial indicators and 19 corporate governance indicators for accurate prediction of bankrupt companies by developing algorithm using supervised AI techniques that includes techniques of support vector machine linear, support vector machine radial basis function, decision tree model ,logistic regression and neural networks. For this purpose, we will collect data of non-financial bankrupt and nonbankrupt companies for the period of 2010-2020 of Pakistani companies as Pakistan has gone through major transition phase during these years. Our results proved that both financial ratios and corporate governance indicators are better means for predicting bankruptcy than using either of them alone with 96.4% accuracy.