Genetic programming and rough sets: A hybrid approach to bankruptcy classification

The high social costs associated with bankruptcy have spurred searches for better theoretical understanding and prediction capability. In this paper, we investigate a hybrid approach to bankruptcy prediction, using a genetic programming algorithm to construct a bankruptcy prediction model with variables from a rough sets model derived in prior research. Both studies used data from 291 US public companies for the period 1991 to 1997. The second stage genetic programming model developed in this research consists of a decision model that is 80% accurate on a validation sample as compared to the original rough sets model which was 67% accurate. Additionally, the genetic programming model reveals relationship between variables that are not apparent in either the rough sets model or prior research. These findings indicate that genetic programming coupled with rough sets theory can be an efficient and effective hybrid modeling approach both for developing a robust bankruptcy prediction model and for offering additional theoretical insights.