Determinants and Predictors of SMEs’ Financial Failure: A Logistic Regression Approach

Youssef Zizi,Mohamed Oudgou,Abdeslam El Moudden

doi:10.3390/risks8040107

Youssef Zizi, Mohamed Oudgou + Show 1 more

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https://doi.org/10.3390/risks8040107

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Journal: Risks	Publication Date: Oct 16, 2020
Citations: 23	License type: CC BY 4.0

Affiliation: Université Ibn-Tofail, Université Sultan Moulay Slimane

Abstract

This paper aims to identify the determinants and predictors of Small and Medium-sized Enterprises (SMEs)’ financial failure. Within this framework, we have opted for a quantitative method based on a sample of healthy and failing SMEs of a Moroccan bank. The main results of the different optimal models are obtained by the stepwise method of estimating logistic regression. These results show, in a normal economic context, that the variables that discriminate between healthy and failing SMEs are the main predictors of financial failure. Autonomy ratio, interest to sales, asset turnover, days in accounts receivable, and duration of trade payables are the variables that increase the probability of financial failure, while repayment capacity and return on assets reduce the probability of failure. These variables present an overall classification rate of healthy and failing SMEs of 91.11% three years before failure and of 84.44% two years and one year before failure.

Highlights

Our choice will focus on those that contribute to discrimination between Small and Medium-sized Enterprises (SMEs) that are healthy and those that are failing with respect to the definition we have adopted
The null hypothesis of the test assumes that the medians of healthy and failing firms are equal on one variable
We find that the variables R14, R15, R18, and R25 are highly correlated with each other and with other variables, generally at the 1% threshold. These variables may negatively affect the predictive quality of logistic regression models, which is why we decided to exclude them from the analysis

Summary

Introduction

It has attracted the attention of researchers since the beginning of the 20th century with the first studies held by (Fitzpatrick 1932). The works on business failure can be economic, financial, strategic, organizational and managerial. Casta and Zerbib (1979) gave three definitions of business failure. Failure concerns the action of filing for bankruptcy due to an insolvency situation. It is characterized by deterioration in the profitability and assets of the firm. The failure relates to cash flow problems (the available assets of the company cannot meet its liabilities)

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