Article2008

Data system for assessing probability of failure in SME reorganization

24 citations0/0 files storedIndustrial Management & Data Systems

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Financial Distress and Bankruptcy Prediction Corporate Insolvency and Governance Organizational Downsizing and Restructuring

Abstract

Purpose The purpose of this paper is to develop a data system to assess failure probability in small to medium‐sized enterprise (SME) reorganization. Design/methodology/approach The data system is based on information from 83 reorganized Finnish SMEs. Information is divided into four types: pre‐filing non‐financial, pre‐filing financial, reorganization submission, and reorganization plan information. Partial least squares (PLS) analysis is used in data mining to factorize information for each type of information. Logistic regression analysis is applied to assess failure probability. Findings Useful data system can be developed on the basis of pre‐filing non‐financial information to support reorganization decision. Pre‐filing financial information only marginally improves quality of information. Submission and reorganization plan information improve quality in terms of fit but do not significantly improve classification accuracy. Research limitations/implications The sample is small and should be expanded in further studies. The system is developed for Finnish reorganizing firms. It can be generalized to any similar reorganization process. Practical implications The data system is useful for managers, lending specialists, investors, reorganization lawyers, and judges. It warns a SME about reorganization failure before filing petition (passive use). It is also useful in developing successful reorganization plans (active use). Originality/value This paper builds an extensive data system for assessing reorganization failure risk. It makes use of many variables that have not been analyzed in reorganization studies earlier. It deals with SMEs that is rare in reorganization studies. The paper utilizes PLS in assessing failure probability. It includes new analytical results on PLS.

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References

2003The DeLone and McLean Model of Information Systems Success: A Ten-Year Update 1992Information Systems Success: The Quest for the Dependent Variable 200535 years of studies on business failure: an overview of the classic statistical methodologies and their related problems 2005Corporate Financial Distress and Bankruptcy 1992Turnaround: Retrenchment and recovery 1978The Bankruptcy Decision 2004Predicting Firm Financial Distress: A Mixed Logit Model 1976Corporate Turnaround Strategies: A Study of Profit Decline and Recovery

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