Bankruptcy Classification of Firms Investigated by the US Securities and Exchange Commission: An Evolutionary Ensemble Computing Model Approach

This paper develops an adaptive ensemble Genetic Algorithm (GA) model for bankruptcy classification of firms cited in the SEC’s Accounting and Auditing Enforcement Release (AAER). Our research contributes to the bankruptcy literature in several ways. First of all, it fills a gap in bankruptcy classification by developing a domain specific model for AAER firms. Secondly, by using financial and nonfinancial variables, the GA model generates and optimizes a set of if-then comprehensible rules for the failure classification of AAER firms. Thirdly, we develop a model using bagging that incorporates the output from different models or sources. Finally, we demonstrate the key role of the fitness function in determining the successful performance of a financial failure GA model.