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The role of financial constraint factors in predicting SME default

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Karas M., Režňáková M.
Equilibrium. Quarterly Journal of Economics and Economic Policy
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2021
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vol. 16
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issue 4
859-883
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.
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The Effects of a Change in the Environment on Business Valuation Using the Income Capitalization Approach

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Režňáková M., Karas M.
Equilibrium. Quarterly Journal of Economics and Economic Policy
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2012
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vol. 7
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issue 2
EN
Determining the company value in the conditions of unstable development is a very difficult, almost sophisticated activity. The experience of authors confirms high sensitivity of the resulting company value in relation to critical input parameters, which are known as value drivers. One of these drivers, in case of determining the company value using the income capitalization approach, is the expected sales. In practice, some authors, but mainly experts, limit sales forecast to extrapolation of the identified trend of the past development, while neglecting the importance of the strategic analysis. The aim of the strategic analysis is to identify all factors which may influence future company objectives, i.e. also future sales. This article provides a possible approach to the correction of sales forecast based on the information gained from the strategic analysis.
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A novel approach to estimating the debt capacity of European SMEs

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Karas M., Režňáková M.
Equilibrium. Quarterly Journal of Economics and Economic Policy
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2023
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vol. 18
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issue 2
551-581
EN
Research background: The concept of debt capacity assumes that a maximum value of debt ratio exists that when exceeded triggers unfavourable consequences, such as drop in market value, default or a change in the business' creditworthiness. With the current state of the art there is a priori no theoretical assurance that such a specific value exists, or rather it is represented by an interval of values. Beyond that, our understanding of debt capacity is often limited to a theoretical approximation by firm-specific factors, while the context of macroeconomic factors, especially those critical for SMEs, is neglected. Purpose of the article: The aim of this paper is to present a novel approach to estimating SMEs' debt capacity. Further, the aim is to answer the question of what firm-level and macroeconomy conditions lead to exhausting the SMEs' debt capacity and under what conditions a specific value of maximum debt capacity could be estimated. Methods: To estimate the debt capacity, we suggest a use of an information entropy minimising heuristic and the Minimal Description Length Principle. In this approach, the observed feature space is categorised into several regions. In this case, such a region represents a set of firm- and macroeconomy-specific conditions forming the debt capacity of the SMEs. To the best of our knowledge, such an approach has not yet been used in debt capacity applications. Findings & value added: We found out that the debt ratio itself provides little explanation of exhausted debt capacity, suggesting that high debt levels are compensated for by other factors. By using the suggested approach, a set of more than 100 different regions was analysed. It was found that in case of five regions (sets of conditions) the debt capacity is exhausted, as the high level of debt has significant distress consequences.
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