Abstract
This paper aims to compare the usefulness of tax arrears and financial ratios in bankruptcy prediction. The analysis is based on the whole population of Estonian bankrupted and survived SMEs from 2013 to 2017. Logistic regression and multilayer perceptron are used as the prediction methods. The results indicate that closer to bankruptcy, tax arrears’ information yields a higher prediction accuracy than financial ratios. A combined model of tax arrears and financial ratios is more useful than the individual models. The results enable us to outline several theoretical and practical implications.
Highlights
In the year 2018, half a century had passed from the foundational multivariate bankruptcy prediction study conducted by Altman (1968)
This paper aims to compare the usefulness of tax arrears and financial ratios in bankruptcy prediction
The univariate results provide an initial indication that tax arrears have remarkable predictive power and this result is further elaborated with multivariate analysis
Summary
In the year 2018, half a century had passed from the foundational multivariate bankruptcy prediction study conducted by Altman (1968) During this time, hundreds of financial ratio-based prediction models have been published (see e.g., reviews by Ravi Kumar and Ravi 2007; Sun et al 2014; Alaka et al 2018). Financial reporting delays or non-submission of reports are fairly common in case of SMEs, especially for financially distressed firms (Clatworthy and Peel 2016; Luypaert et al 2016). The latter is characteristic to Estonia as well (Lukason 2013; Lukason and Camacho-Miñano 2019). The financial ratios needed for prediction might be incorrect or not available
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