Long-term risk class migrations of non-bankrupt and bankrupt enterprises

This paper investigates how the process of going bankrupt can be recognized much earlier by enterprises than by traditional forecasting models. The presented studies focus on the assessment of credit risk classes and on determination of the differences in risk class migrations between non-bankrupt enterprises and future insolvent firms. For this purpose, the author has developed a model of a Kohonen artificial neural network to determine six different classes of risk. Long-term analysis horizon of 15 years before the enterprises went bankrupt was conducted. This long forecasting horizon allows one to identify, visualize and compare the intensity and pattern of changes in risk classes during the 15-year trajectory of development between two separate groups of companies (150 bankrupt and 150 non-bankrupt firms). The effectiveness of the forecast of the developed model was compared to three popular statistical models that predict the financial failure of companies. These studies represent one of the first attempts in the literature to identify the long-term behavioral pattern differences between future "good" and "bad" enterprises from the perspective of risk class migrations.