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Three essays on SMEs credit risk and capital structure

El Kalak, Izidin


Izidin El Kalak


Alcino Azevedo


The main purpose of this study is to provide further insight into the SMEs’ credit risk and capital structure. Thus, this thesis presents three essays on SMEs probability of bankruptcy and capital structure in chapter 3 to chapter 5. The first empirical chapter investigates the extent to which size affects the SMEs probabilities of bankruptcy. I use a dataset of (11,117) US non-financial firms, of which (465) filed for insolvency under chapters 7/11 between 1980 and 2013. I forecast the bankruptcy probabilities by developing four discrete-time duration-dependant hazard models for SMEs, Micro, Small, and Medium firms. A comparison of the default prediction models for medium firms and SMEs suggest 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 of the micro and small firms with the SMEs firms strongly suggest that they need to be considered separately when modelling credit risk for them.
The second empirical chapter investigates the reasons for SMEs’ choice of being debt-free in their capital structure. Furthermore, I study to what extent different SME size segments (namely micro, small, and medium) affect the debt-free decision. I use a dataset of 95,450 firm-year observations of which there are 18,764 debt-free firm-year observations. I find that borrowing constraints and financing activities play a significant role in the debt-free capital structure decisions of the SMEs. A surprising result is that a large number of debt-free SMEs pay significantly higher dividends than their counterparts with debt. Finally, I find that pension obligations, and lease commitments do not play a significant role in explaining the debt-free policy. However, when conducting the logit regressions on entry and exit decisions of the debt-free SMEs I find that the NDTS plays a significant role in explaining the firm’s decision whether to enter or exit the debt-free status.
According to the capital structure hypothesis, if firms deviate too far from their optimum capital structure they will not maximize their value. However, an increasing number of firms across different countries follow a debt-free policy, preferring to have no leverage compared to that which would maximize the firm value. In line with the above statement, the third chapter tries to address the question of what is the impact of a debt-free decision on the default risk of SMEs in the US market and how this substantial deviation from the optimal capital structure affects the SMEs’ probabilities of failure compared to their leveraged counterparts. I forecast the bankruptcy probabilities by developing two discrete-time duration-dependant hazard models for debt and debt-free models. A comparison between the models shows that four explanatory variables: the research and development ratio, tangible assets, abnormal capital expenditure, and asset sales affect the probability of bankruptcy differently for each model, thus suggesting a potential need to treat debt and debt-free SMEs separately when modelling credit risk.


El Kalak, I. (2015). Three essays on SMEs credit risk and capital structure. (Thesis). University of Hull. Retrieved from

Thesis Type Thesis
Deposit Date Mar 15, 2022
Publicly Available Date Feb 24, 2023
Keywords Business
Public URL
Additional Information Business School, The University of Hull
Award Date Nov 1, 2015


Thesis (2.9 Mb)

Copyright Statement
© 2015 El Kalak, Izidin. All rights reserved. No part of this publication may be reproduced without the written permission of the copyright holder.

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