Decision Support System Based on Fuzzy Logic for Assessment of Expected Corporate Income Performance

Abstract

This study presents a decision-support method to estimate the next year performance of corporate Operating Income Margin (OIM). It is based on a unique combination of cross-section model and the rules-based evaluation mechanism. The estimate is done in terms of broad categories, and not precise numerical values. The model is constructed as follows: its dependent variable (OIM) is one year ahead vs. the corresponding explanatory variables. This structure of the model allows us to view explanatory variables as reflecting financial potential of corporations. The evaluation component consists of a set of rules designed to identify the companies whose “potential” clearly points to an opportunity to invest. For the method presented here to succeed, it is necessary to utilize a highly reliable modeling method, even if it is “Fuzzy”. We apply Soft Regression (SR), which is a Soft Computing modeling tool based on Fuzzy Logic, and utilize all available proxy variables by creating intervals of values. Advantages of utilizing SR, and the intervals’-based modeling are extensively discussed. Modeling results for five consecutive years are consistent and stable, thus indicating high degree of reliability. Testing indicates very high success rate for the stock market related domain, the lowest being 87.9%.