Predicting zombie firms after the COVID-19 pandemic using explainable artificial intelligence

This study examines various artificial intelligence (AI) models for predicting financially distressed firms with poor profitability (“Zombie firms”). In particular, we adopt the Explainable AI (“XAI”) approach to overcome the limitations of the previous AI models, which is well-known as the black-box problem, by utilizing the Local Interpretable Model-agnostic Explanations (LIME) and the Shapley Additive Explanations (SHAP). This XAI approach thus enables us to interpret the prediction results of the AI models. This study focuses on the Korean sample from 2019 to 2023, as it is expected that the COVID-19 pandemic increases the number of zombie firms. We find that the XGBoost model based on a boosting technique has the best predictive performance among several AI models, including the traditional ones (e.g. the logistic regression). In addition, by using the XAI approach, we provide visualized interpretations for the prediction results from the XGBoost model. The analysis further reveals that the return on sales and the selling, general and administrative costs are the most impactful variables for predicting zombie firms. Overall, this study focusing on several AI models not only shows the improvement for the prediction of zombie firms (relative to the traditional models) but also increases the reliability of the prediction results by adopting the XAI approach, providing several implications for market participants, such as financial institutions and investors.

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Publication Details

Journal
Journal of Derivatives and Quantitative Studies 선물연구
Published
2024-11-06
DOI
https://doi.org/10.1108/jdqs-08-2024-0035
Citations
2
Primary Topic
Financial Distress and Bankruptcy Prediction
Type
article
Field-Weighted Citation Impact
1.89
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article

Predicting zombie firms after the COVID-19 pandemic using explainable artificial intelligence

Dong-Wook Seo, Hyeong Joon Kim, Seongjae Mun
2 citations
Journal of Derivatives and Quantitative Studies 선물연구
Financial Distress and Bankruptcy Prediction
1.89
article

Predicting zombie firms after the COVID-19 pandemic using explainable artificial intelligence

Dong-Wook Seo, Hyeong Joon Kim, Seongjae Mun
article en
2 citations

Abstract

This study examines various artificial intelligence (AI) models for predicting financially distressed firms with poor profitability (“Zombie firms”). In particular, we adopt the Explainable AI (“XAI”) approach to overcome the limitations of the previous AI models, which is well-known as the black-box problem, by utilizing the Local Interpretable Model-agnostic Explanations (LIME) and the Shapley Additive Explanations (SHAP). This XAI approach thus enables us to interpret the prediction results of the AI models. This study focuses on the Korean sample from 2019 to 2023, as it is expected that the COVID-19 pandemic increases the number of zombie firms. We find that the XGBoost model based on a boosting technique has the best predictive performance among several AI models, including the traditional ones (e.g. the logistic regression). In addition, by using the XAI approach, we provide visualized interpretations for the prediction results from the XGBoost model. The analysis further reveals that the return on sales and the selling, general and administrative costs are the most impactful variables for predicting zombie firms. Overall, this study focusing on several AI models not only shows the improvement for the prediction of zombie firms (relative to the traditional models) but also increases the reliability of the prediction results by adopting the XAI approach, providing several implications for market participants, such as financial institutions and investors.

Journal of Derivatives and Quantitative Studies 선물연구Vol. 32(4)
Dongguk University (KR), Kongju National University (KR), Soonchunhyang University (KR), Gongju National University of Education (KR)
No poverty
Openalex Percentile: Top 11%
Financial Distress and Bankruptcy Prediction
1.89
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