Explaining financial difficulties based on previous payment behavior, management background variables and financial ratios

Abstract

This paper shows evidence that it is possible to explain financial difficulties in small and medium sized firms based on non-financial variables. The results indicate that the estimated model based on non-financial variables classified firms even better than the financial ratio model, especially when classifying bankrupt firms and firms with payment delays. The best overall classification was achieved using the model combining financial ratios and non-financial variables. The non-financial variables measuring the number of payment delays were statistically the most important. The main implication of the results is that non-financial variables embrace important information in attempts to explain financial difficulties, and this should be of interest given that payment behavior variables (payment delays and payment disturbances) may occur more frequently than the publication of intermittent financial statements.

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