Measurement of the probability of insolvency with mixture-of-experts networks

The information how probable it is that a given company becomes insolvent is important for owners, creditors and other financiers of this company. Especially investors are in need of this information to calculate and control the risk they take with all investment decision. We show in this paper how the probability of corporate failure can be measured with artificial neural networks (ANN), namely mixture-of-experts networks. With the help of 8,660 financial statements of 3,125 industrial companies we developed a mixture-of-experts network that is able to classify 90% of all companies which became insolvent within the next three years correctly; the corresponding misclassification rate of actually solvent firms is only 29% (Jerschensky (1998)).