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Default Prediction for Russian Food Service Firms: Contribution of Non-Financial Factors and Machine Learning
The food service industry’s instability due to COVID-19 and sanctions has heightened the need for developing an efficient tool to assess default risks in this in- dustry. Default prediction modelling relies heavily on how well a model fits the specif- ic environment. Due to that, some adjustments have to take place in order to adapt the classical default prediction models to the Russian food service industry. We build hypoth- eses that adding non-financial factors and employing modern prediction methods can increase the accuracy of the models significantly. The aim of this study is to determine the effect of non-financial factors’ inclusion and modern modelling methods on the ac- curacy of default prediction for the food service industry in Russia. Tests for a sample of 1241 firms for the period from 2017 to 2021 have shown that creating a prediction mod- el with modern methods, such as Random Forest and XGBoost increases the accuracy of the prediction from 70 % to about 80 %, compared to standard Logit model. The ad- dition of non-financial factors to the models also increases the accuracy slightly, which however, does not provide a significant effect. The most important metrics in predicting default turned out to be Current Liquidity Ratio and the ratio of Working Capital to Total Assets. The most important non-financial factors are Total Assets and Age. Our results correspond with existing research in this field and form a new knowledge layer due to being applied to a specific industry. The results can be used by banks or other counter- parties that interact with food service industry firms in order to assess their credit risk.