Abstract
Various types of government credit guarantee programs exist for small- and medium-sized enterprises (SMEs). The SMEs guaranteed by these programs can resolve their financial difficulties by obtaining loans from banks or being included in a pool for the issuance of primary collateralized bond obligations. However, the loan default rate for these supported firms is high owing to their moral hazard, which can be associated with unethical behavior in the accounting process. Since the stakeholders of credit guarantee programs initiated by the government include not only lenders and borrowers, but also taxpayers, the default risk of moral hazard must be minimized. Thus, an additional evaluation step is required to deal with accounting ethics, which has not thus far been considered in the literature. In this study, we propose an accounting ethics-based credit scoring model as a complementary approach, which can be used to select suitable borrowers. The proposed model is expected to reduce the default rate resulting from the moral hazard associated with unethical accounting behaviors in the supported firms.
Highlights
Small- and medium-sized enterprises (SMEs) play an important role in entrepreneurship and job generation
This study proposes a complementary credit scoring model based on the accounting ethics of SMEs
The focus of this study is loan defaults among SMEs associated with moral hazard that can be predicted by accounting practices
Summary
Small- and medium-sized enterprises (SMEs) play an important role in entrepreneurship and job generation. Consideration of moral hazard behavior of the supported SMEs is important in Korea This is because the Korean government continuously expanded its credit guarantee scheme to avoid a temporarily illiquid in SMEs after the Asian financial crisis and the scale of credit guarantee reached to about 6–8% of GDP, which is much higher than other nations—0.1% in the United States and less than 3% in Taiwan. The default rate among P-CBO guaranteed firms turned out to be high, the weights assigned to the individual components of the scorecard needed to be re-tuned to predict default risk in a better manner Against this background, this study proposes a complementary credit scoring model based on the accounting ethics of SMEs. The proposed model is developed based on P-CBO data.
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