Functional Similarity of Financial Trajectories for Corporate Bankruptcy Prediction: A k-Nearest Neighbors Approach

Corporate risk prediction is a central problem in financial analysis and corporate risk management. This study proposes a functional approach in which firms are represented through multivariate financial trajectories constructed from retrospective windows of accounting indicators, over which a similarity measure is defined and incorporated into a k-nearest neighbors classifier. The target variable is derived from administrative records, combining reporting discontinuity and firm administrative status as a proxy for financial distress. The empirical application is conducted using data from firms in the tourism sector in Colombia and is evaluated through stratified cross-validation. The results show that the trajectory-based representation captures gradual patterns of financial deterioration and improves the performance of k-NN relative to its static variable counterpart. In addition, the approach enhances interpretability by enabling the identification of historically comparable firms and the analysis of the financial dimensions that explain their similarity. Overall, the model provides a complementary perspective for corporate risk analysis based on the comparison of financial trajectories.