TREE-BASED METHODS IN THE INVESTIGATION OF CORPORATE PROFITABILITY: VARIABLE SELECTION AND MODEL SEGMENTATION

Abstract

The aim of the study is to introduce 2 tree-based modeling tool in the field of corporate profitability - where they have not been used yet - and apply them together in order to reveal the relationship between the variables determining the profitability, to investigate whether the marginal e®ect of certain variables is stable over the range of other variables or it shows significant instabilities in addition to revealing the patterns in the profitability drop as a consequence of the economic crisis. The 2 algorithms - random forests whose prediction is based on several random trees as well as the model-based recursive partitioning incorporating the data-driven nature of the trees and the theory-based nature of the statistical-econometrical modeling - turned out to be applicable for the purposes of the study based on their favourable characteristics highlighted in the relevant literature.