The role of financial constraint factors in predicting SME default

• Authors: Michal Karas , Mária Režňáková

Abstracts

EN

Research background: SMEs face financial constraints in their development, which limits their access to external funds, tightens their investment possibilities, and limits their growth. Much research effort has been devoted to understanding the nature and sources of this phenomenon. In sharp contrast to this, very little has been said about the role of these factors in explaining the default probability of these types of enterprises. Understanding such interrelationships could help to adopt policies to alleviate the situation of constrained SMEs and lower their default rates. Purpose of the article: This study analyses the role of financial constraint factors in SME defaults. This is done by utilising the financial constraint factors in a newly derived default prediction model. A comparison of the derived model and other SME default prediction models is carried out to assess the potential of financial constraints in the discrimination power of the model. Methods: In this study, we use the Cox semiparametric model, while leaving the baseline hazard rate unspecified and employing macroeconomic variables as explanatory variables. The discrimination power was addressed in terms of the area under the curve (AUC), resulting in out-of-sample testing. The DeLong test was used to compare the AUC of the created and analysed models. The model was estimated on a set of over 213,731 SMEs from 28 counties, covering the period 2014?2019. Findings & value added: It was found that adopting the financial constraint measures can explain the default of small and medium enterprises with high accuracy; however, they do not explain the default of micro enterprises.

Keywords

EN

financial constraint; SMEs; default; Cox’s hazard model

• Publisher: Instytut Badań Gospodarczych
• Journal: Equilibrium. Quarterly Journal of Economics and Economic Policy
• Year: 2021
• Volume: 16
• Issue: 4
• Pages: 859-883

Dates

published

2021

Contributors

author

Michal Karas

• Brno University of Technology

• https://orcid.org/0000000188241594

author

Mária Režňáková

• Brno University of Technology

• https://orcid.org/000000027261607X

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Identifiers

DOI

10.24136/eq.2021.032

Biblioteka Nauki

22444291