Predictions of failure and financial distress: A study on Portuguese high and medium-high technology small and mid-sized enterprises

Abstract

The main purpose of this paper is to find the differences in the impacts of financial factors on business failure and financial distress. Using the traditional logistic regression method, this paper studies the ability of financial indicators to predict business failure and financial distress of small and mid-sized enterprises in Portuguese high and medium-high technology manufacturing sectors. The research results show that: (1) differences between financially healthy firms and failed firms are more obvious than differences between financially healthy firms and financially distressed firms; (2) the accurate rate of failure prediction decreases with time prolonging (from one year to three years prior to the event), whereas that of financial distress prediction maintains stable at a relatively lower level; (3) profitability is the most important indicator, which is negatively related to the probability of both business failure and financial distress; (4) debt-related and liquidity-related factors (especially indebtedness and general liquidity) are also important in predicting business failure and financial distress. This paper enriches the research literature on the predictions of both business failure and financial distress.

Probability of Corporate Bankruptcy: Application to Portuguese Manufacturing Industry SMEs

“…These results contradict those obtained for example by Ohlson (1980) or Platt and Platt (1990). The CACL and CFTD ratios are statistically significant and show the expected effect on the bankruptcy probability for the Portuguese manufacturing industry SMEs (an effect recently confirmed by Tong and Serrasqueiro, 2021). The CACL ratio has a negative coefficient similar to the one presented by Almansour (2015).…”

“…In his study, it was also possible to verify that the variable used to measure the firm size had high capacity in the bankruptcy forecast and that estimation by the MDA reached results inferior to those obtained by the logit model. Afterward, some papers were developed based on the logit model developed by Ohlson (1980), namely Zavgren (1985), Platt and Platt (1990), Kim and Gu (2006), Zeitun et al (2007), Bonfim (2009), Bartual et al (2013) and Tong and Serrasqueiro (2021). Kovacova et al (2018) validate its use and Jones et al (2017) evaluate alternative statistical frameworks.…”

“…Bartual et al (2013) applied the logit methodology and obtained a model with an accuracy of 88,1%, and Kim and Gu (2006), in their study of the US hotel sector, succeeded in obtaining a model with a bankruptcy prediction capability of 91 % and 84% one and two years in advance, respectively. Recently, in a study for Portuguese high and medium-high technology SMEs, Tong and Serrasqueiro (2021) evidenced that profitability is the most significant indicator of business failure and financial distress. Also, the authors evidenced that indicators related to debt and liquidity were also important in predicting business failure, but the accurate rate of prediction of business failure significantly decreases with time.…”

“…(1) Beaver (1966); Altman et al (1977); Zmijewski (1984); Almansour (2015); Tong and Serrasqueiro (2021) (2) Platt and Platt (1990); Kim and Gu (2006); Pervan et al (2011); Lakshan and Wijekoon (2013) -…”

“…Since one prediction model would not work well in different national environments and economic periods, it is necessary to develop prediction models for specific national conditions and a particular period (Tong & Serrasqueiro, 2021). (Jardim & Pereira, 2013).…”