Firm failure prediction for small and medium-sized enterprises and new ventures

Weiyu Wang · Maria João Guedes

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Financial Distress and Bankruptcy Prediction Corporate Insolvency and Governance Firm Innovation and Growth

Abstract

Abstract New ventures and small and medium-sized enterprises (SMEs) are the engines that drive the development of the economy, productivity, and business. However, they differ with respect to their natures, and that may affect their choices and success. This paper investigates the determinants of failure for SMEs and new ventures in Portugal by employing a logistic regression technique to develop the one-year prediction models individually over the period from 2010 to 2018. The results show that age and size always play significant roles in discriminating the failure risk of both types of firm, but the financial predictors selected in the final default prediction models for SMEs and new ventures vary. Moreover, based on financial, age, and size predictors, the SME model performs much better than that of the new venture in the classification accuracy reported. This indicates that separate treatment should be carried out while predicting the failure likelihood of SMEs and new ventures.

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References

1968FINANCIAL RATIOS, DISCRIMINANT ANALYSIS AND THE PREDICTION OF CORPORATE BANKRUPTCY 1977The Population Ecology of Organizations 1980Financial Ratios and the Probabilistic Prediction of Bankruptcy 1966Financial Ratios As Predictors of Failure 1995Inside the Black Box: The Credit Channel of Monetary Policy Transmission 2001Forecasting Bankruptcy More Accurately: A Simple Hazard Model 1983The Liability of Newness: Age Dependence in Organizational Death Rates 1992Survival Chances of Newly Founded Business Organizations

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