Expected cost of financial distress in small and medium-sized enterprises (SMEs): A German-Italian comparison (original) (raw)
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Advances in finance, accounting, and economics book series, 2018
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Predicting Financial Distress of Small and Medium-Sized Entities
The International Journal of Business & Management, 2021
Predicting Financial Distress of Small and Medium-Sized Entities 1. Introduction Small and Medium Enterprises (SMEs) play an important role in social inclusion and contribute significantly to Indonesia's economic growth. From job creation to poverty alleviation, Indonesian SMEs account for nearly 56 percent of business investment and 97 percent of domestic employment. As was stated by Yosina and Taghizadeh-Hesary (2018) thatthe role of SMEs in economy can be seen from: (1) their important role in economic activities in various industries, (2) their roles in the development of local economic activities, (3) their key roles in the creation of new markets and innovation sources, and (4) their role in maintaining the balance of payments through export activities. Despite the great role of SMEs in the national economy, the sector is still struggling with basic problems. Generally, SMEs are still poor in business management skills, limited human resource productivity, poor access to finance and weak in penetration of the market (Pham, 2017), low human resource quality and low creativity (Geleta & Talegeta, 2019), and development inefficiency (Taiwo A et al, 2012). These problems confirm previous research which suggests that many SMEs have not been financeable, either due to lack of clear financial management, or lack of managerial and financial capability (ADB, 2015). If SMEs have long-term financial difficulties and are unable to change their business operations, they will face difficulties in the tight competition. They will suffer losses which, in turn, will lead to bankruptcy (financial distress). According to Platt and Platt (2006), financial distress is a stage of financial decline that occurs before bankruptcy or liquidation. If the issue is not addresses quickly, it will have a detrimental impact on companies, including a loss of reputation and eventual bankruptcy. According to Luciana (2003), a business is categorized as suffering financial distress if it has a negative operating profit for two consecutive years. A corporation that has obtained a negative operating result for more than a year indicates that the financial position of the organization has deteriorated. If the company management does not take any corrective actions, the company may experience bankruptcy. Companies with financial difficulties typically have a low profitability ratio. Meanwhile, the liquidity ratio of a company in financial distress is normally less than one, indicating that the company's current assets are insufficient to cover its total liabilities. In most cases, the equity ratio of a company in financial distress is greater than one, indicating that the company's debt exceeds its total assets. External factors, such as clients, auditors, vendors, the government, and business representatives, are also used to predict a firm's financial potential. External parties usually respond to distress signals including late deliveries, poor product quality, a lack of customer confidence, and unpaid bank or creditor bills. An examination of financial statements and the computation of financial ratios can be used to determine whether or not a company is in trouble. These financial
Revista de Contabilidad
This study contributes to identifying common distress patterns in financial indicators by sector and country in Finland, France, Germany, Italy, Portugal, and Spain as well as ex-post signals of reorganization success. We use PDFR that provides a distance-to-failure measure and allows us to track the behavior of different features of the firm proxied by accounting ratios. Our results show that indicators of financial structure, followed by working capital, profitability on assets, margin over sales and cash flow to assets, are the most discriminant variables of failed SMEs across all sectors and countries analyzed. By contrast, during reorganization, return on assets and its components are the main initial drivers of recovery, whereas the financial structure factors show a progressive but slow recovery. Boosting and Z-scores are used for robustness. Este estudio contribuye a la identificación de patrones comunes de fracaso en indicadores financieros por sector y país en Alemania, Es...
Predictors of Financially Distressed Small and Medium-Sized Enterprises: A Case of Malaysia
This study aims to investigate factors contributing to financial distress among manufacturing SMEs. By employing the logistic regression, we find that age, size, debt ratio, sales to total assets and net income to share capital could predict financially distressed SMEs for the 4-year prior to distress model. However, 3-year prior to distress, more variables, namely age, size, debt ratio, short-term to total liabilities, current ratio and EBIT to total assets, are found to be significant. As companies are nearer to distress situation, less number but important variables emerged. Two year prior to distress, age, debt ratio and EBIT to total assets remained significant while one year prior to distress, only debt ratio could predict financially distressed companies. This ratio is found to be consistently significant in all periods.
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We consider all serious and neglected concerns while developing discrete and continuous time duration dependent hazard models for predicting default of US SMEs. Comparing theoretical and classification performance aspects of popular hazard models, namely discrete hazard models with logit and clog-log links and the extended Cox model, we report superior performance of discrete hazard models than extended Cox models in classifying defaulted SMEs. Additionally, our proposed default definition for SMEs based on legal bankruptcy laws and firms’ financial health performs significantly better than their alternative counterparts in identifying distressed firms, with superior goodness of fit measures across all econometric specifications.