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The effect of size on the failure probabilities of SMEs : an empirical study on the US market using discrete hazard model

El Kalak, Izidin; Hudson, Robert

Authors

Izidin El Kalak

Abstract

This paper investigates the extent to which the size affects the SME probabilities of bankruptcy. Using a dataset of (11,117) US non-financial firms, of which (465) filed for insolvency under chapters 7/11 between 1980 and 2013. We forecast the bankruptcy probabilities by developing four discrete-time duration-dependent hazard models for SMEs, Micro, Small, and Medium firms. A comparison of the default prediction models for medium firms and SMEs suggests that an almost identical set of explanatory variables affect the default probabilities leading us to believe that treating each of these groups separately has no material impact on the decision making process. However, comparisons between the micro and small firms with the SMEs firms strongly suggest that these categories need to be considered separately when modelling their credit risk.

Journal Article Type Article
Publication Date 2016-01
Journal International review of financial analysis
Print ISSN 1057-5219
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 43
Issue January
Pages 135-145
DOI https://doi.org/10.1016/j.irfa.2015.11.009
Keywords SMEs; Bankruptcy; Size; Discrete-time duration-dependent hazard model; G200
Publisher URL http://www.sciencedirect.com/science/article/pii/S1057521915001994
Additional Information Authors' accepted manuscript of article published in: International review of financial analysis, 2016, v.43.

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