Using the random forest algorithm to rank the components of working capital management effective on the occurrence of financial distress

Document Type : Research Paper

Authors

1 Department of Economics, Management & Accounting. Accounting and Financial. Yazd University

2 Department of Economics, Management & Accounting. Yazd University. Yazd. Iran

3 Assistant Professor, Department of Accounting & Finance, Faculty of Economic, Management and Accounting, Yazd University, Yazd, Iran

4 Department of Economics, Management & Accounting. Economical sciences. Yazd University

Abstract

The main goal of this research is to rank the importance of each component of working capital management in predicting the occurrence of financial distress of companies. The study population consists of 167 companies listed on the Tehran Stock Exchange during the years 2019 to 2023. In order to achieve the goal of the research, 7 components of the most important components of working capital management affecting financial helplessness have been selected. Additionally, using Zavgren's (1985) financial distress prediction model, the sample companies were classified into two groups: financially distressed and healthy. Then, in the first step, using the random forest algorithm, the power of 7 selected indicators of working capital management has been measured in predicting the financial distress of companies. The research results indicate that working capital management indicators can be successful, up to 85%. In the second step, the ranking of the importance of each of the working capital components was done in order to reach a score of 85% in correctly identifying the class of companies using the unique feature of the random forest algorithm in this field. The findings of the research show that the debt collection period is significantly more important than other components of working capital in predicting financial distress.

Keywords

Journal of Asset Management and Financing

Articles in Press, Accepted Manuscript
Available Online from 19 June 2024

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