International Journal of Computer Science & Information Technology (IJCSIT) Vol 7, No 3, June 2015

COMPARISON OF WAVELET NETWORK AND

LOGISTIC REGRESSION IN PREDICTING
ENTERPRISE FINANCIAL DISTRESS
Ming-Chang Lee1 and Li-Er Su2
1

National Kaohsiung University of Applied Sciences

Shih Chien University, Kaohsiung Campus, Kaohsiung Taiwan

ABSTRACT
Enterprise financial distress or failure includes bankruptcy prediction, financial distress, corporate
performance prediction and credit risk estimation. The aim of this paper is that using wavelet networks in
non-linear combination prediction to solve ARMA (Auto-Regressive and Moving Average) model problem.
ARMA model need estimate the value of all parameters in the model, it has a large amount of computation.
Under this aim, the paper provides an extensive review of Wavelet networks and Logistic regression. It
discussed the Wavelet neural network structure, Wavelet network model training algorithm, Accuracy rate
and error rate (accuracy of classification, Type I error, and Type II error). The main research opportunity
exist a proposed of business failure prediction model (wavelet network model and logistic regression
model). The empirical research which is comparison of Wavelet Network and Logistic Regression on
training and forecasting sample, the result shows that this wavelet network model is high accurate and the
error, wavelet networks model is better than
overall prediction accuracy, Type error and Type
logistic regression model.

KEYWORDS
Wavelet Networks; Logistic Regression; Business Failure Prediction; Type I error; Type

error.

1. INTRODUCTION
Business Failure Prediction (BFP) can help to avoid investing in business likely to fail.
Bankruptcy prediction model enhance the decision support tool and improve decision making
[33]. It uses statistical analysis and data mining technique. Statistical business failure prediction
models attempt to predict the business failure or success. The Multiple discriminant analysis
(MDA) has been the most popular approaches [6, 13]. There have a large number of alternative
techniques available in this MAD model [2, 9, 22, 33]. The data mining techniques include
decision tree, support vector machine (SVM) [10], neural networks (NNs) [11], fuzzy system,
rough set theory and genetic algorithm (GA) [33]. Various researches have demonstrated the
artificial intelligence (AI) techniques serve as a useful tool bankruptcy prediction such as artificial
neural networks (ANNs) [30].
The following method or model using for prediction in time series are Box-Jenkins method [28],
Grey forecasting model [11], artificial neural networks model [1, 4, 16], Logistic Regression [25,
30], ARMA Model [21]. In Box-Jenkins method, it is difficult to determine the model features;
it is also difficult to identify no-steady state. It is not need to calculate the statistical characters in
grey forecasting model or neural network model. But, grey forecasting model is suitable for
solve exponential growth practical problems. The network modelling approach in artificial neural
DOI:10.5121/ijcsit.2015.7307

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International Journal of Computer Science & Information Technology (IJCSIT) Vol 7, No 3, June 2015

networks model is difficult to determine the network structure by using scientific application. In
training and learning state, BP model calculate the optimal weight. This model trapped in a local
minimum which will affect the reliability and accuracy of the model. ARMA Model provides
one of the basic tools in time series modelling. This method is valid in pure AR model and pure
MA model. But, it is difficult for identification in mixed ARMA model. Therefore, using
wavelet network clustering capabilities, the input time series sample autocorrelation function
(SACF) value and partial autocorrelation function (SPACF) value, the output is the identification
of ARMA model. Many researchers [20, 29, 36] discussed the ability of nonlinear approximation
of wavelets and neural network models. Some researches [31, 32, 34] studied fuzzy wavelet
neural network models for prediction and identification of dynamical systems.
The main contribution of this paper is to propose a financial distress prediction method based on
Wavelet Network model and logistic regression model. The financial and non-financial ratios
were used to enhance the accuracy of the financial distress prediction model. The dimension of
the inputs was reduced using a principal component analysis (PCA) method, and then Wavelet
Network model were used to predict the financial distress.

2. LOGISTIC REGRESSION MODEL AND WAVELET NETWORK

MODEL
2.1. Logistic regression model
Defines the probability (x) and 1- (x) , these probabilities are written in the following form:
( x ) = P ( Y = 1 X 1, X 2 ,..., X

1 ( x) = P(Y = 0 X 1, X 2 ,..., X n )
( x)
This model of the ln
is:
1 ( x)

ln

P(Y = 1 X 1, X 2 ,..., X n )
1 P(Y = 1 X 1, X 2 ,..., X n )

= ln

(1)

n
( x)
= 0+ j X j
1 ( x)
j =1

(2)

Using the inverse of the Logit transformation of (2), it obtains at the following:
n

0+ j X j

P(Y = 1 X 1, X 2 ,..., X n ) =

e
1+ e

j =1

n
0+ j X j
j =1

=
1+ e

n
( 0+ j X j )
j =1

(3)

(3) is a logistic regression model, the conditional mean is between 0 and 1.

2.2. Maximum Likelihood Estimate (MLE)

The maximum likelihood is the method of parameter estimation in logistic regression model. For
a set of observations in the data ( xi , yi ) , the following equation results for the contribution to the
likelihood function for the observation ( xi , yi ) is ( xi ) :
(4)
( xi ) = ( xi ) yi [1 ( xi )1 yi ]
The observations are assumed to be independent of each other so it can multiply their likelihood
contributions to obtain the complete likelihood function l ( ) . The result is given in (5).
Where is the collection of parameters ( 0 , 1 ,..., n ) and l ( ) is the likelihood function of .
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International Journal of Computer Science & Information Technology (IJCSIT) Vol 7, No 3, June 2015

n
l ( ) = ( xi )
i =1

(5)

L(B ) is denoted the log likelihood expression.

n
L( ) = ln[l ( )] = ( yi ln[ ( xi )] + (1 yi ) ln[1 ( xi )])
i =1

(6)

It employs the techniques of calculus to determine the value of based on maximum of L( ) . It

takes the derivate of L( ) with respect to 0 , 1,..., n and setting the resulting derivatives equal
to zero. These equations are called likelihood estimations, and there is n +1 equation.

2.3. Hypothesis testing

The hypothesis testing that a coefficient on an independent variable is significantly different from
zero use Wald statistic.
The Wald statistic for the coefficient is:
2 = Wald = [ / ]2

(7)

This is distributed chi-square with 1 degree of freedom.

2.4. Wavelet network model t

Wavelet analysis is a new technique designed for multi scale analysis in the time series
modelling. Wavelet analysis utilizes the wavelet basis function to approximate and extract the
features of interests from the original data. If the function (t ) satisfies the following condition
is called wavelet basis function.
( w) dw <
(8)
0
w

Where (w) is the Fourier transform of (t ) in the frequency domain. Variable t can actually
have other unit [12].
The wavelet basis function a,b (t ) =

1
a

t b
)
a

(9)

Where a refers the scale (dilated) coefficient, b refers the translation coefficient.
Wavelet networks employ activation function that are dilated and translated coefficient of a single
function : R d R , where d is the input dimension [36]. This function called the mother
wavelet is localized both in the space and frequency domains [7]. In order to increase
convergence speed, the wavelet neural network shows surprising effectiveness in solving the
conventional problem of poor convergence or even divergence encountered in other kind of
neural network [38].
Wavelet network model is feed forward network model; the wavelet basis function is neuronal
activation function. The basic strategy is changing the shape and scale wavelet basis, adjusting
the network weights and threshold value to take the error function minimization. Figure 1 is
Wavelet neural network structure.
Three layers of the wavelet neural network are input layer, hidden layer and output layer. Each
layer is fully connected to the nodes in the next layer.
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International Journal of Computer Science & Information Technology (IJCSIT) Vol 7, No 3, June 2015

{xi } : The Input value of the sample, i = 1, 2,.., M .

{ y p } : The output value of the sample p.
wk : The weight of linking hidden layer with output layer, k = 1, 2,.., K
The output value of the sample p in network:
K
M
i bk
y p = [ wk xi (
)] : (t ) = 1 (1 + exp(t ))
ak
k =1 i =1
1 (t ) > 0.5
y=
0 (t ) < 0.5

x1
x2

1 b1
)
a1

(
(

2 b1
)
a1

M b1
)
a1

w1

xM

1 bk
(
)
ak

(
(

(10)

wk

2 bk
)
ak

M bk
)
ak

Figure 1: Wavelet neural network structure

The minimum mean error function:

E=

1 P
2
{d p y p )
2 p =1

(11)

Where

d p : The output of expected classification of the sample p, d p : = 1 or 0

M: The number of input layer.
K: The number of hidden layer
P: The number of sample

2.5. Wavelet network model training algorithm

The training algorithm for a wavelet neural network is as follows [35].
(1) Select the no of hidden nodes required. Initialize parameters ak , bk , and wk with random
number in [1, 1]. Give objective mean error Emax . The Mother wavelet is has the following
form
(t ) = cos(1.75t ) exp( t 2 2)
d
dt

(12)

= [t cos(1.75t ) + 1.75 sin(1.75t )] exp( t 2 2]

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International Journal of Computer Science & Information Technology (IJCSIT) Vol 7, No 3, June 2015

When taken as Gaussian wavelet it become

(t ) = exp( t 2 2)

(13)

(2) Input training sample { xi } and the objective output {d p } . Calculate the output { y p } and he
minimum mean error function E.
(3) Adjust ak , bk , and w k for reducing the error of production. Use the conjugate gradient
descend algorithm is employed:
wk (t + 1) = wk (t ) +

E
+ wk (t )
wk

E
+ ak (t )
ak
E
bk (t + 1) = bk (t ) +
+ bk (t )
bk

a k (t + 1) = ak (t ) +

t' =

(14)

i bk
ak

Where
P M
E
= (d p y p ) ' (t ' ) xi (t ' )
wk
p =1i =1
P
M

E
= (d p y p ) wk xi
(t ' )
(t ' )
ak

a
k
k
p =1i =1
P
M
E

p
p
= (d k y k ) wk
(t ' )
(t ' )
bk
b
b

k
k
p =1k =1

(15)

Where and are the learning and the momentum rates respectively.
(4) Return to step (2) the process is continued until E satisfies the give error criteria, and the
whole training of wavelet neural network is completed.

2.6. Accuracy rate and error rate

Since Type I error only creates a lost opportunity cost from not dealing with a successful
business, for example, missed potential investment gains [17], therefore Type I error is more
important than Type II error. The objectives of predictive of accuracy should be to reduced Type I
error while keep Type II error. Table 1 denotes as robustness of model. The measure used for
calculating the accuracy of classifying distressed companies and no-distressed companies have:
B
A+ B
C
Type II error =
C+D

Type I error =

E = A /( A + B)
F = D /(C + D)
G = ( A + D ) /( A + B + C + D)

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International Journal of Computer Science & Information Technology (IJCSIT) Vol 7, No 3, June 2015

Where
Type I error: refer to the situation when actual failure company is classified as non
failures company
Type II error: refer to the situation when actual non failure company is classified as
Failures Company.
C: the number of Type I error that is the number of distressed companies in the sample
based on actual observation that was misclassified as a non-distressed company.
B: the number of Type II error that is the number of non-distressed companies in the
sample based on actual observation that was misclassified as a distressed company.
A: the number of non-distressed accurately classified by the models
D: the number of distressed accurately classified by the models
E: The accuracy of classification of non-distressed company
F: The accuracy of classification of distressed company
G: The oval accuracy of classification
Table 1: Robustness of model
No-distressed
Observed value
Non-distressed company
Distressed company
Overall accuracy of
classification

Non-distressed
company
A
C

Distressed company
B
D

Accuracy of
Classification
E
F
G

3. EMPRICAL RESEARCH
We random select in the stock market listed company's traditional manufacturing in Taiwan
to analysis the wavelet network model prediction. The steps of business failure prediction model
(Wavelet network model and logistic regression model) are:
Step 1: Financial ratio of dataset
Step 2: Identification of independent variables
Step 3: Reduced the number of financial ratio
(a) Kolmogorov-Smirnov test (K-S test)
(b) Wilcoxon test
(c) Principal component analysis
Step 4: Building the wavelet networks model
(a) Wavelet networks model
(b) Training for a wavelet neural network
(c) Robustness of model in prediction accuracy
Step5: Building Logistic regression model
(a) Logistic regression model
(b) Training for Logistic regression
(c) Robustness of model in prediction accuracy
Step 6: Comparison of Wavelet Network and Logistic Regression

3.1. Financial Ratio of Dataset

A dataset of covariates used in this study includes a combination of financial ratios and market
variables [15]. Some researches such as [3, 8, 9, 23~24, 26~27, 39] have been widely used
financial ratios in explaining the possibility of business financial distress. Gibson [14] suggests
five factors (Profitability, Liquidity, Leverage, Efficiency, and Valuation ratio) for evaluation enterprise
financial failure. Table 3 is the 15 rations selected in this study.
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International Journal of Computer Science & Information Technology (IJCSIT) Vol 7, No 3, June 2015
Table 3: The 15 rations selected in this study

x1
x2
x3
x4
x5
x6
x7
x8
x9
x10
x11

Category
Profitability

Liquidity
Leverage
Efficiency

Valuation ratio

x12
x13
x14
x15

Growth ability

Covariate
EBIT margin
Return on Equity
Return on Assets
Current ratio
Quick ration
Debt ratio
Debt to Equity ratio
Fixed Asset turnover
Capital turnover

Code
EBT
ROE
ROA
CUR
QUK
DET
DER
FAT
CAT

Price to Sales ratio

Price earnings ratio

PSR
PER

Price to book value

PBV

Operating Profit grew

Net profit grow rate
Inventory turning rate

OPG
NPG
ITR

Definition
EBIT/operating revenue
Net income/ Total equity
Net income/ Total assets
Current assets/ current liabilities
Quick assets/ current liabilities
Total liabilities/ Total assets
Total liabilities/ Total equity
Revenue/Asset
Operating revenue/ operating invest
capital
Stock price per share/ Sales per share
Stock price per share/Earnings per
share
Stock price per share/Equity per
share
Operating Profit grew rate
Net profit grow rate
Sale/ Inventory

3.2. Data collection and Sample

This paper random select sample listed companies from 2006 to 2009 for estimating sample.

3.3. Reduced the number of financial ratio

There are three ways to reduce the large number of financial indicators (1) Financial indicators
normal distribution test (Kolmogorov-Smirnov test (K-S test)) (2) Paired samples significant test
in financial indicators (Wilcoxon test) (3) Principal component analysis (PCA). PCA is a
statistical procedure that uses an orthogonal transformation to convert a set of observations of
possibly correlated variables into a set of values of linearly uncorrelated variables called principal
components. The number of principal components is less than or equal to the number of original
variables.
(1) Kolmogorov-Smirnov test (K-S test)
The K-S test has the advantage of making no assumption about the distribution of data. Suppose
that an Independent and Identically Distributed (i.i.d.) sample x1 , x2 ,... xn with some unknown
distribution p and we would like to test the hypothesis that p is equal to a particular (normal)
distribution p 0 , i.e. decide between the following hypotheses:
: p = p 0 , H1 : p p 0 . We know that testing this hypothesis use chi-squared goodness-offit test.
(2) Wilcoxon test (Wilcoxon signed-rank test)
H

The Wilcoxon signed-rank test is a non-parametric statistical hypothesis test used when
comparing two related samples, matched samples, or repeated measurements on a single sample
to assess whether their population mean ranks differ (i.e. it is a paired difference test). Wilcoxon
test used as (1) an alternative to the paired Student's t-test, (2) t-test for matched pairs, (3) the ttest for dependent samples when the population cannot be assumed to be normally distributed.
(3) Principal component analysis (PCA)
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International Journal of Computer Science & Information Technology (IJCSIT) Vol 7, No 3, June 2015

The main purposes of a PCA are (1) the analysis of data to identify patterns (2) finding patterns to
reduce the dimensions of the dataset with minimal loss of information. In the table of principal
component variance, it select no of components in this data testing, according to the cumulative
variance above to 95%.

3.4. Building the wavelet networks model

In wavelet network model, the numbers of neurons of the input and output layers are respectively
equal to the number of variables presented simultaneously to the network and to the number of
variables that the neural network must estimate. Wavelet network model the number of principal
components is equal to the number of input layer neuron. The number of output layer neuron is
1. The output neuron takes the value 0 if the company is healthy (no-financial distress) and 1 if it
is bankrupt (financial distress). To determine the number of hidden layer node is by researcher.
After determining the network architecture, its implementation requires two data samples. The
first set of data is used for the training, the second for the validation. The neural network is been
realized using Matlab software. Model input values of paired samples are the score value of
principal components.

3.5 Building Logistic regression model

Logistic regression model input values of paired samples are the score value of principal
components. The dependent variable in logistic regression is usually dichotomous, that is, the
dependent variable can take the value 1 with a probability of success p ( yi ) , or the value 0 with
probability of failure 1 p( yi ) .
The Logistic regression is been realized using Spss21.0 software and the Wald statistic for test the
coefficient.
The predict probability of occurrence p ( yi ) given as:
p ( yi ) = 1 {1 + exp[( 0 + 1 x1 + .... + m x m )]}

The output p ( yi ) > 0.5 takes the value 0, the company is healthy (no-financial distress) and
p ( yi ) < 0.5 takes the value 1, and the company is bankrupt.

3.6. Robustness of model in prediction accuracy

It easily calculates the accuracy rate and Error rate. Type I error is

B
% and Type II error is
A+ B

C
% (See Table 1).
C+D

4. EMPIRICAL ANALYSIS
4.1. Data collection and Sample
This paper select sample listed companies from 2006 to 2009 for training sample. There select 40
paired samples for analysis. It randomly selected 20 paired sample listed companies from 2009 to
2012 for forecasting sample.

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International Journal of Computer Science & Information Technology (IJCSIT) Vol 7, No 3, June 2015

Through the kolmogorov- Siminor test (using SPSS20.0 software), no financial indicator on
paired sample is normal distribution. Through wilcoxon test, ten variables are selected as
potential predictor variables: EBIT margin (x1), Return on Equity (x2), Return on Assets (x3),
Current ratio (x4), Quick ration (x5), Fixed Asset turnover (x8), Price earnings ratio (x11), Price to
book value (x12), Operating Profit grew (x13), Net profit grow rate (x14). The paired financial
indicators sample wilcoxon test denotes as Table 4.
Table 4: The paired financial indicators sample wilcoxon test

Financial
Statistic
indicator
value
X1 (EBIT)
-2.012
X2 (ROE)
-3.325
X3 (ROA)
-4. 855
X4 (CUR)
-4.121
X5 (QUR)
-1.968
X6 (DET)
-1.763
X7 (DER)
-0.213
X8 (FAT)
-2.164
X9 (CAT)
-1.357
X10 (PSR)
-1. 656
X11 (PER)
-3.902
X12 (PBV)
-1.993
X13 (OPG)
-2.133
X14 (NPG)
-3.258
X15 (ITR)
-1.885
* Significant at 5 percent level

Z- 2-taied test p-value

0.042
0.001
0.000
0.000
0.045
0.084
0.812
0.032
0.160
0.085
0.002
0.047
0.034
0.001
0.068

Result
*
*
*
*
*

*
*
*
*

4.2. Principal component analyse

PCA is statistical procedure that uses an orthogonal transformation to convert a set of
observations of possibly correlated variables into a set of values of linearly uncorrelated variables.
It uses SPSS 21.0 software on PCA. It gets 8 principal components (z1, z2, z3, z4, z5, z6, z7, z8), it
contains the original 10 financial indicators 97.82% (see table 5).
Tab 5: The principal component Variance

Principal
components
z1
z2
z3
z4
z5
z6
z7
z8
Z9
Z10

Eigenvalue

Variance (%)

3.165
1.315
1.088
0.935
0.921
0.834
0.781
0.753
0.155
0.065

31.642
13.043
10.863
9.347
9.225
8.336
7.712
7.652
1.540
0.640

Cumulated
(%)
31.642
44.685
55.548
64.895
74.120
82.456
90.168
97.820
99.760
100.00

Variance

The component score express as:

* + a x* + a x * + a x*
z i = a1i x1* + a 2i x*2 + a3i x3* + a 4i x*4 + a5i x5* + a8i x8* + a11i x11
12i 12
13i 13 14i 14
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International Journal of Computer Science & Information Technology (IJCSIT) Vol 7, No 3, June 2015

Where i = 1, 2, ...., 8,

x xi
, xi : the mean of financial indicator, s i : the standard
x1* = i
si

deviation of financial indicator. Table 6 is denoted as the component scored matrix.

For example,
* 0.052x* 0.085x* 0.176x*
z1 = 0.068x1* 0.03x*2 + 0.538x3* + 0.615x*4 0.056x5* 0.042x8* 0.034x11
12
13
14

Table 6: The component scored matrix.

Principal
component
x1* (EBIT)

z1

z2

z3

z4

z5

z6

z7

z8

-0.068

0.008

0.054

-0.013

0.046

0.017

0.072

0.027

x*2 (ROE)

-0.03

-0.011

-0.112

-0.042

-0.006

0.003

-0.041

x3* (ROA)

0.538

-0.036

-0.035

-0.058

-0.024

-0.036

0.003-0.012

x*4 (CUR)

0.615

-0.010

-0.042

-0.042

-0.038

-0.035

-0.003

-0.127

x5* (QUR)

-0.056

0.040

0.019

0.016

0.011

0. 986

0.006

-0.011

x8* (FAT)

-0.042

0.032

0.012

-0.043

0.0031

0.036

0.052

0.053

* (PER)
x11

-0.034

0.056

0.079

0.009

-0.006

0.002

0.912

-0.019

* (PBV)
x12

-0.052

0.031

0.048

-0.007

0.589

0.017

-0.054

-0.078

* (OPG)
x13

-0.085

-0. 042

-0.012

0.831

-0.006

0. 015

0.008

-00.94

* (NPG)
x14

-0.176

0.055

0.024

-0.017

-0.068

-0.011

-0.017

5.015

lab

software.

-0.124

4.3. Wavelet network model training and forecasting

The

wavelet

network

training

and

forecasting

use

Mat

Vector

( z1 , z1 , z 3 , z 4 , z 5 , z 6 , z 7 , z8 ) is input of this model. Model input values of paired samples are 40,

the input layer neuron is 8. The hidden layer neuron is 6 and the output layer neuron is 1. Set
minimum mean error function E = 0.001 , = 0.1 , = 0.01 . The paired samples are 40 for training
test. Predicted results denoted as table 7.
Table 7: Robustness of model (training sample)
No-distressed
Observed value
Non-distressed company
Distressed company
Overall accuracy of
classification

Type I error is

Non-distressed
company
38
1

Distressed company
2
39

Accuracy of
Classification (%)
95
97.5
96.25

B
C
% = 5% and Type II error is =
% = 2.5%
A+ B
C+D

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International Journal of Computer Science & Information Technology (IJCSIT) Vol 7, No 3, June 2015

In order to test the predictive capability of model, paired samples are 20 for forecasting test.
Predicted results denoted as table 8.
Table 8: Robustness of model (forecasting sample)
No-distressed
Observed value
Non-distressed company
Distressed company
Overall accuracy of
classification

Type I error is

Non-distressed
company
16
3

Distressed company
4
17

Accuracy of
Classification (%)
80
85
82.25

B
C
% = 20% and Type II error is =
% = 15%
A+ B
C+D

4.4. Logistics regression model training and forecasting

Model input values of paired samples are 40. Vector ( z1 , z1 , z 3 , z 4 , z 5 , z 6 , z 7 , z8 ) is input of this
model. The Logistic regression is been realized using Spss21.0 software and the Wald statistic
for test the coefficient. Since
2 = Wald = [ / ]2 =24.123

It has 0.1% significant effective. The logistic regression model is:

p ( yi ) = 1 {1 + exp[0.0448 1.286 z1 0.654 z 2 0.295z 3 0.879 z 4 + 0.308z 5 2.55 z 6 + 0.985z 7 0.675z8 ]}

Table 9 is denoted as the results of logistic regression.

Table 9: The results of Logistic regression model
Variable

coefficient

z1
z2
z3
z4
z5
z6
z7
z8
constant

-1.286
-0.654
--0.295
-0.879
0.308
-2.555
0.985
-0.675
-0.448

Standard
deviation
0.413
0.346
0.276
1.421
0.324
1.692
0.268
0.311
0.388

Wald statistic
10.356
3.378
1.211
0.389
0.926
1.467
0.152
4.971
1.273

Degree
freedom
1
1
1
1
1
1
1
1
1

probability
0.001
0.056
0.294
0.531
0.334
0.224
0.716
0.025
0.251

Table 10 and table 11 are robustness of model in training and forecasting samples respectively.
Table 10: Robustness of model (training sample)
No-distressed
Observed value
Non-distressed company
Distressed company
Overall accuracy of
classification

Non-distressed
company
30
8

Distressed company
10
32

Accuracy of
Classification (%)
75
80
77.5

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International Journal of Computer Science & Information Technology (IJCSIT) Vol 7, No 3, June 2015

Type I error is

B
C
% = 25% and Type II error is =
% = 20%
A+ B
C+D
Table 11: Robustness of model (forecasting sample)

No-distressed
Observed value
Non-distressed company
Distressed company
Overall accuracy of
classification

Type I error is

Non-distressed
company
14
3

Distressed company

Accuracy of
Classification (%)
70
85
77.5

6
17

B
C
% = 30% and Type II error is =
% = 15%
A+ B
C+D

4.5. Comparison of Wavelet Network and Logistic Regression

In comparison of Wavelet Network and Logistic Regression on training and forecasting sample,
from the table 7, table 8 and table 10, table 11, no matter how the overall prediction accuracy,
Type error and Type error, wavelet networks model is better than logistic regression model.

5. CONCLUSION
This paper select sample listed companies from 2006 to 2009 for training sample. There select 40
paired samples for analysis. It randomly selected 20 paired sample listed companies from 2009 to
2012 for forecasting sample.
Wavelet method and Logistic regression are introduced to suppress the financial distress
prediction accuracy degradation due to potential accounting noise. In this paper, it use
Kolmogorov-Smirnov test (K-S test), Wilcoxon test, Principal component analysis (PCA) to
select potential predictor variables that are informative and closely related to companies financial
condition.
In this paper, it has two experiments to compare the prediction accuracy between Wavelet
methods with Logistic regression method. From the results of training and forecasting sample
test, the wavelet networks model in this paper on enterprises financial distress early warning is
valid. The result of comparison of Wavelet Network and Logistic Regression denoted as table 12.
Table 12: Comparison of Wavelet Network and Logistic Regression
Model
Wavelet
Network model

Logistic
Regression

Type error
Type error
Overall accuracy
classification
Type error
Type error
Overall accuracy
classification

of

Training
0.05
0.025
0.9625

Forecasting
0.2
0.15
0.8225

of

0.25
0.2
0.775

0.30
0.15
0.775

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International Journal of Computer Science & Information Technology (IJCSIT) Vol 7, No 3, June 2015

In Table 12, the comparison of Wavelet Network and Logistic Regression on training and
forecasting sample, no matter how the overall prediction accuracy, Type error and Type
error, wavelet networks model is better than logistic regression model.

ACKNOWLEDGEMENTS
I would like to thank the anonymous reviewers for their constructive comments on this paper.

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